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Reduce your Taxes by Claiming your Capital Loss


I’ve done quite a few articles on taxation before, but I realize that I’ve never written about calculating capital loss specifically.  This article comes with perfect timing as most investors have losses in their non-registered portfolios this year and perhaps seriously considering pulling the trigger to claim those capital losses.

What is a capital loss?

It’s simply where you sell a stock in your non-registered portfolio for a loss.  From here, it just seems like a loss, but there is a bright side.  Unlike investments within your RRSP (or TFSA), capital losses within a non-registered portfolio can be claimed against your capital gains for the year (or previous years).

Here are some important facts about capital losses:

  1. Capital losses can only be claimed on investments within taxable investment accounts.
  2. Only 50% of capital losses can be claimed.
  3. Capital losses can be claimed against capital gains in the current year, up to 3 previous years or carried forward indefinitely.  However, it can be claimed against income on the year of the tax payers death (comforting hey?).
  4. Tax loss selling must be made before December 24 of that year as it takes 3 days to settle the trade.

How Tax Loss Selling Works – An Example

Say for example Jim (@ 40% MTR) had $10,000 in capital gains in 2008, but also $4,000 in capital losses.  What is the resulting tax payable?

There are two ways to calculate this, both of which turn out with the same result:

  1. $10,000 – $4,000 = $6,000 x 50% x 40% = $1,200 tax payable
  2. $10,000 x 50% X 40% = $2,000 capital gains tax; $4,000 X 50% X 40% = $800 capital loss claim; result = $1,200 tax payable.

Last question is why would you sell for tax loss?  Sometimes at the end of the year, you realize that you’ve made some bad stock picks that have a low probability of recovering.  Why not dump the losers, claim the tax deduction and move on?

As I’m not a tax advisor, this is simply my interpretation from government documentation on how capital loss is calculated.  Tax experts are welcome to chime in on any errors.

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 48 comments… add one }

  • MoneyGrubbingLawyer December 4, 2008, 9:16 am

    Good explanation, FT.

    One of my goals for December is to dump a few of my real losers to claim the loss. I had some great successes during the first few months of the year (thanks, RIM and POT!) and I’ll have some capital gains owing, so I might as well dump a few of those stocks that I’ve given up on to offset the tax liability.I’m sure there are a lot of people in the same situation.

  • steve December 4, 2008, 10:21 am

    I’m not sure but isn’t there also some rule that prevents you from repurchasing the same stock within a certain time frame? But if you have say an S&P500 ETF that you sell, you could purchase a different S&P500 ETF and still claim the capital loss now.

  • Scott December 4, 2008, 10:49 am

    @ steve: I think the rule is 30 days. Could be wrong though.

    Are capital losses applicable ONLY against capital gains? I have no capital gains this year but can I file for losses any way?

  • Dividend Growth Investor December 4, 2008, 10:56 am

    There’s always a tradeoff between putting all your investments in a taxable versus a non-taxable account. The tax loss deduction on capital losses is something that is important.

    Another tough decision is whether to sell all your losers now, and buy them back several months later.. even if you like the stocks for the long run..

  • 17th Avenue December 4, 2008, 11:16 am

    Good post! With the current market condition, more people is going to claim capital loss for previous years, and I am one of them.

  • Acorn December 4, 2008, 11:23 am

    Since almost all really bad news have been released (I hope), the only one think that might be overlooked by many is this “December’s sell-off”. I’m afraid that it might trigger another market swing down because this year sell-off can be a massive one…

  • nobleea December 4, 2008, 12:07 pm

    I think if you haven’t already done your tax loss selling, you could be in for an even larger capital loss if it’s done in the last week of december. The tax loss season this year will be worse than most, especially when coupled with the bad financial news that gets pumped out every day.

  • Xenko December 4, 2008, 1:34 pm

    “Tax loss selling must be made before December 24 of that year as it takes 3 days to settle the trade.”

    I don’t think that is correct. I believe that the trade date is what counts for income tax purposes, and not the settlement date.

    I can’t find a reliable source to back this up, so if someone can prove it one way or the other, that would be appreciated.

  • FrugalTrader FrugalTrader December 4, 2008, 3:19 pm

    Xenko, I believe I originally read that information in my CSC course manual a few years back. If you can find data that indicates otherwise, I would be interested in seeing it.

  • FrugalTrader FrugalTrader December 4, 2008, 3:22 pm

    steve, you can read more about the superficial loss rule here:
    http://www.milliondollarjourney.com/how-investing-taxes-work-part-1.htm

  • DQ December 4, 2008, 3:47 pm

    The superficial loss rules are applicable to the same holdings over 30 days. This means that if you sell something for a loss, it could be purchased on day 31 and not be counted as a superficial loss. If purchased in the 30 day window it is considered to be a superficial loss. However if you are merely changing from one ETF to another ETF that hold the exact same weightings of stock (ie. an S&P 500 ETF would be indentical to another S&P 500 ETF) it will be considered a superficial loss even though it is a different ETF in name. It is the holdings of the ETF that are key, not merely the name. Losses can only offset gains.

  • jefty_jeff December 4, 2008, 5:26 pm

    Thanks for all the interesting posts.
    I’m not sure I understand what a taxable investment account is though.
    I’ve lost a significant amount of money by investing into some unfortunate US stocks this summer through Questrade’s margin trading account. I was day trading. I sold and repurchased the same stock several times within a week, and sometimes within a day. In the end there was 0 gain and almost a total loss. Will I be able to claim that as capital loss, or will that violate the superficial loss rule?
    Thank you in advance!
    J.

  • Susan December 4, 2008, 5:55 pm

    Newbie question: what is MTR? Thanks.

  • FrugalTrader FrugalTrader December 4, 2008, 5:57 pm

    Susan, sorry, I should have been more clear. MTR = Marginal Tax Rate

  • Susan December 4, 2008, 6:39 pm

    Thank you!
    Your post is most helpful-very clear. I will be applying this info along with many others.

  • Thicken My Wallet December 4, 2008, 10:19 pm

    A good read for anyone who had to redeem Rothmans this year.

  • Stephen Winters December 4, 2008, 11:05 pm

    Is this similar to a capital loss (gain) on real estate investment property?

  • blaze@blaze.com December 5, 2008, 12:14 am

    I thought I heard it was 60 days. You can’t have purchased the equity 30 days before you sell it for a tax loss and you can’t re-purchase it and 30 days after.

  • Rocket Spanish December 5, 2008, 12:41 am

    with the way the markets are going I think this would probably be the best thing. It is a long harder to buy and hold when you see the value of your stocks dropping everyday and we are just about to enter the recession in canada

  • DK December 5, 2008, 3:35 pm

    Be careful about selling your losers and buying them back 31 days later. This might make sense as a tax-deferral strategy if you have current year capital gains taxes to offset. But if you’re like me and have no gains to offset, I don’t think the sell-and-buy-back strategy has anything to offer for Canadians (with one exception, see below). Why? Because sure you get a capital loss carry forward but remember you also just reduced the ACB (adjusted cost base) of your holdings by the same amount. Eventually, when you sell those securities you will realize a greater capital gains tax. The higher capital gains combined with your tax-loss carryforward nets out to putting in exactly the same position tax-wise had you simply held your losers.

    You see lots ot talk in U.S. articles about selling your losers and buying them back in 31 days because in the U.S., capital losses can be applied to reduce ordinary income by up to $3000, and everyone (hopefully) has ordinary income to reduce. The rules are different in Canada. Here you can only apply capital losses to capital gains so if you don’t have capital gains the sell and buy back strategy isn’t effective.

    So what’s the exception? If you sell in a non-reg account and buy those securities back 31 days later in a reg-account (preferably TFSA). That way you get the benefit of a tax-loss carryforward without a corresponding capital gain as you will not incur the capital gains tax when you eventually sell.

  • Money Minder December 5, 2008, 5:06 pm

    Since almost all really bad news have been released (I hope), the only one think that might be overlooked by many is this “December’s sell-off”. I’m afraid that it might trigger another market swing down because this year sell-off can be a massive one…

  • Sarlock December 7, 2008, 6:27 am

    The sell today, buy in 31 days strategy only works if you have capital gains in that tax period that you can offset the loss against. Then you can take advantage of reducing your taxes today in exchange for paying them back later (assuming your investment returns to its original value) and, in theory, yielding a return on the money for the year or more that you get to hold it. You have to balance this against the cost of the trade commission to both sell and re-buy your stock, so this is a factor as well.

  • Jim December 7, 2008, 9:08 am

    I have made around 85 trades for 2008. What sort of documentation do I need to send to revenue Canada? I wont have to send copies of all my confirmations will I ? Thanks

    • FrugalTrader FrugalTrader December 7, 2008, 9:40 am

      When you file your taxes, you’ll need to record your trades. For a higher volume trader, i’m not sure if you can simply attach a spreadsheet and simply indicate your capital gain/loss. You should consult an accountant.

  • Scott December 7, 2008, 9:09 pm

    Jim — you may have to send in all confirmations. The banker I deal with also trades futures (not sure how he day-trades while he’s at work…) and he said it took him THREE (3) MONTHS to do his taxes because he had to sort out all of his trades (about a phonebook thick pile of trade documents).

  • Jim December 8, 2008, 1:03 pm

    Thanks for the info. Im wondering.. I plan to make possibly 150 trades next year .I have friends who make more than 300 trades. How does Revenue Canada track all of this ?

  • Karim December 8, 2008, 3:25 pm

    I have never claimed capital gains or loss but I had a few OTC Stocks since 2yrs or so but none of them actually made any profit, infact they all either came down in their market price or completely closed down, in which case I had to sell them this year in July/2008. RBC sold the stocks for me and whatever they gained from it, they used it as their commission but I personally did not get anything from it. In addition to this loss, I also had to pay a fee to RBC for managing the account of $130. I am wondering if there is anyway for me to claim any of this in my taxes for this year ? Appreciate your advice.
    Thanks,
    Karim

  • Denis December 8, 2008, 4:23 pm

    @ Jim – “Thanks for the info. Im wondering.. I plan to make possibly 150 trades next year .I have friends who make more than 300 trades. How does Revenue Canada track all of this ?”

    They don’t … You do. That’s what an audit’s for … To make sure you’re being honest in your reporting.

  • cannon_fodder December 8, 2008, 5:09 pm

    A question came up on BNN asking if it is 30 business days or 30 calendar days. The guest expert didn’t know the answer (a bit surprising, really).

  • cannon_fodder December 8, 2008, 5:14 pm

    jefty_jeff:

    If you buy and sell a particular stock several times within 30 days but then finally get sick of the stock and sell it without repurchasing it, then you can claim the capital loss after you have adjusted your cost base.

    Here is a link to a calculator I’ve used before (yes, I didn’t create my own calculator for this purpose – at least not yet!):

    http://www.fiscalagents.com/toolbox/cal/invest/acb.shtml

  • cannon_fodder December 8, 2008, 5:18 pm

    DK,

    Those are good points, but consider this: if you believe it is always better to defer tax paid and you expect that in the future you will have capital gains perhaps from other equities, then this would allow you to take the capital loss sooner rather than later.

    It is a case of “banking” the capital loss now to be used as soon as you need it rather than waiting until the “end”.

    What do you think?

  • cannon_fodder December 8, 2008, 5:23 pm

    MoneyMinder,

    That is why some experts are saying don’t wait until the end to do your tax loss selling this year.

    However, if you are in a buying mood, the last week in December could be a good time to dip your toes in some fundamentally good, but beaten down, stocks.

  • DK December 10, 2008, 5:07 pm

    cannon_fodder,

    I think it’s great to “bank” capital losses on equities that you truly want to dispose of. There are exceptions though. For instance if you know you will be selling your cottage in the next year or two, selling-and-buying-back your stock holdings might be a great idea.

  • Audrea December 11, 2008, 12:30 pm

    How do you claim loss for past years, revised past years tax returns? Thanks

  • Carolina December 17, 2008, 12:13 pm

    If I sell stock ABC at a loss in a “conventional brokerage account”
    then can I repurchase stock ABC in a Roth or Traditional IRA within 30 days without IRS problems.

  • Kanu March 13, 2009, 2:36 am

    In Canada, if I have capital gain in 2008 but capital loss in 2009, can I carry forward gains to offset losses in current year? It is in stocks traded on line at TSX, NYSE etc.

  • FrugalTrader FrugalTrader March 13, 2009, 7:28 am

    To claim a capital loss in 2009, you’ll have to wait until 2010 when you are filing for tax year 2009. At that point, you can claim your capital loss against gains up to 3 years back or carried forward indefinitely.

  • MrK April 19, 2009, 11:22 am

    Good article @ http://www.thestarphoenix.com/story_print.html?id=1393145&sponsor=

    How do you ask Canada Revenue Agency to carry back losses to tax returns from prior years? You don’t need to complete T1-Adjustment requests for 2005, 2006 and 2007. Instead, you complete Section 3 of Schedule T1A (Request for Loss Carryback) as part of your 2008 income tax return.

    This form is not in the tax package available at the post office. The easiest way to get it is via the Internet. Search for “CRA T1A,” or go to http://www.cra-arc.gc.ca/E/pbg/tf/t1a.

  • Terry Hiddleston June 2, 2009, 2:21 am

    Hi, I am a little confused. You see a few years ago when Nortel was pretty good I invested about 12,000.00 in it ,starting off buy buing at 30.00 dollars a share to 20 plus per share and as you all no bam! ! It crashed and when they emalgulated with someone else it split but not in our favor thus my to be good investment got worse and worse! My shares widdled to nothing the last few years I just let my $120.00 fee use up the remained of my shares,now it is at O. I would phone in to let them know when and how much to buy but the catch here is it was in a RRSP. Now come the question, can I claim a Capital gains loss and if so can I go back those years to claim 50 % ??PLease give some guidence and thak you. ( Whatever the outcome)!

  • FrugalTrader FrugalTrader June 2, 2009, 9:02 am

    Terry, unfortunately you cannot claim a capital loss within your RRSP.

  • Northern Alex December 10, 2009, 3:35 am

    Did anyone dug deeper if it 30 business days or calendar days before you can rebuy a stock and still claim the loss? :)

  • FrugalTrader FrugalTrader December 10, 2009, 10:03 am

    Alex, here is more on the superficial loss rule

  • SUSD March 1, 2010, 1:47 am

    I’m confused about some of the things I’ve read here. It’s mentioned that you have to submit a “spreadsheet” to Revenue Canada with your trades. Is this every purchase I made or only transactions that are involved in a gain or a loss? And if I have to send them a “spreadsheet” why would they let me decide how to create this. If they have to look at millions of these submissions, why wouldn’t they provide a form for all of us to follow? If I make 12 purchase of 100 shares each month for the same stock resulting in 1200 shares, do they want to see one row for the 1200 shares, or see all 12 lines. In other words do I need to show the work, or just the ABC? Where would I get the daily conversion rates to adjust the currency?!? Would someone mind sharing there spreadsheet template?

  • PK April 6, 2010, 1:47 am

    I bought a company stock a few years ago – now the company went into bankruptcy protection and all my stocks in this company are now “gone”. Can I still claim the capital loss? What documentation would Revenue Canada like to see?

  • FrugalTrader FrugalTrader April 6, 2010, 7:16 am

    PK, check out this article about claiming a capital loss from a delisted stock.

  • Ram April 27, 2011, 12:58 pm

    Nice post! I had a few followup questions – How to take into account time value of money?
    If I bought $10,000 worth of investments 5 years back and sold it at $9,000 and incurred a $1,000 loss then shouldn’t the “risk-free rate of return (treasury bill) + inflation” be taken in account in adjusting the loss?
    In that case the loss is more than $1,000. Has someone tried this? Does CRA allow this?

    Thanks!

  • Jeff March 26, 2012, 3:23 pm

    I own 23 shares of Citigroup that are currently sitting at 77% below what I purchased them for. I’ve been holding onto it for a while as I think Citi is on the way up (finally) but I most likely won’t break even for another 5-10 years.
    Looking for some advise on whether you think I should sell and take the approx. $800 to pay down my line of credit (@ 10% interest rate) which I want to pay off within 12 months. Not sure if I would receive a tax break next year for the investment loss though, since I wouldn’t have any capital gains to report as well.

    This seems like a no-brainer (sell sell sell) but looking for anyone’s objective input.

  • Ed Rempel March 26, 2012, 11:35 pm

    Hi Jeff,

    Wow. Before answering your question, here’s my take:

    1. Never make an investment move only for tax reasons.
    2. If you have no capital gains this year or in the last 3 years, then you won’t have any tax savings from selling (other than reducing future capital gains tax). Capital losses can only be claimed to reduce capital gains.
    3. 10% credit line? That’s a big issue. Can you qualify for a lower rate? Reducing that is a guaranteed 10% return after tax.

    Now I can get to your question. Your decision should be based on the investment merits. Whether or not you own Citigroup should be based on your opinion of its prospects vs. other investments and based on how it fits into your portfolio.

    I don’t look at individual stocks, but one of our fund managers has Citi as one of his top holdings. However, if this is your only investment, you definitely need to diversify.

    Your other option would be to sell, pay off your credit line, then reborrow and reinvest.

    Ed

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