Tax- Loss Harvesting/ Selling

Tax-Loss Harvesting/ Tax-Loss Selling
There has been some inaccurate information floating around the internet lately about ways to save on taxes using losses in your investments. This strategy is known as Tax-Loss Selling or Tax-Loss Harvesting.

The Strategy:

Basically, if you have made an investment, in general, it is unwise to sell that investment at a loss. However, the exception to that is if you do not see a scenario in which the investment will recover, then you can sell the investment at a loss and use it to your advantage from a tax perspective.

How People Think It Works:

I invest $5000 in investment ABC. That $5000 I invested in ABC becomes worth $2500. I have lost -$2500. I sell the investment at a loss and use that -$2500 to lower my INCOME TAX (this is wrong).

How it Actually Works:

I invest $5000 in ABC investment. That $5000 becomes worth $2500. I have lost -$2500. I sell ABC Investment at a loss and use that -$2500 to offset my Capital Gains Tax (this is right).

You can only use a loss to offset a gain from a tax perspective. So if you had $5000 worth of DEF investment and it became $10,000. You Would have a $5000 GAIN. If you bought $5000 of ABC Investment and it became worth $2500. You would have a -$2500 LOSS. This loss can make it so you only pay Capital Gains tax on $2500 GAIN instead of $5000 GAIN.

Don’t create a tax problem for yourself by trying to offset your INCOME with a CAPITAL LOSS. The CRA will find you!