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Tax loss harvesting strategy in volatile markets

Tax loss harvesting strategy in volatile markets

Prerna Chandak, MBA

Vice President ETFs

An effective strategy for investors amidst the recent market volatility is realizing losses on securities to offset capital gains in an investment portfolio. A tax loss harvesting strategy can be implemented without changing the long-term financial goals for an investor. These strategies apply only to non-registered accounts

What is ‘tax loss harvesting’? 

Tax loss harvesting is a method in which an investor incurs losses by choosing to sell securities that currently have a fair market value that is lower than its cost base. These losses will then allow the investor to offset capital gains realized on other investments in the portfolio, ultimately lowering the tax payable in the year.1 Investors must be aware of superficial loss rules – when an investment is sold at a loss, and an identical investment is purchased either 30 days before or after the loss was realized, Canadian tax laws will deny the loss. 

To ensure that the superficial loss rules don’t affect the long-term financial goals of the investor, the individual has the option to add a similar but not identical investment in their portfolio. For example, an ETF can be purchased with the same industry exposure as another ETF (tracking a different index), a mutual fund or other security that was sold to utilize its losses. 

Trade idea: Sell S&P 500 ETFs and/or individual U.S. stocks and invest in QUU

FAANG 

Name

Ticker

Weight

Sector

YTD return (USD)

Facebook Inc. Class A

FB

1.80%

Communication Services

-28.9

Alphabet Inc. Class A

GOOGL

1.60%

Communication Services

-19.9

Alphabet Inc. Class C

GOOG

1.60%

Communication Services

-18.9

Apple Inc.

AAPL

5.20%

Information Technology

-17.3

Amazon.com Inc.

AMZN

3.30%

Consumer Discretionary

-8.6

Netflix Inc.

NFLX

0.70%

Communication Services

-7.6

YTD return for S&P 500 as of March 16, 2020: -25.8%

Trade idea: Sell S&P TSX ETFs and/or individual Canadian stocks and invest in QCE & QCN

Top 5 TSX Stocks

Name

Ticker

Weight

Sector

YTD return (USD)

Royal Bank of Canada

RY

6.70%

Financials

-17.6

Toronto Dominion Bank

TD

5.80%

Financials

-25.1

Enbridge Inc

ENB

4.50%

Energy

-25.1

Canadian National Railway

CNR

4.00%

Industrials

-17.9

Bank of Nova Scotia

BNS

3.70%

Financials

-27.3

YTD return for S&P TSX as of March 16, 2020: -27.1%

1   If the full amount of capital losses cannot be applied against capital gains in the current year, the remaining value of the loss can be carried back for three years and forward indefinitely against capital gains incurred in future years. 

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