The Art and Mystery of Tax-loss Selling

Tax-loss selling is the tax technique of using investment losses against capital gains to cut your overall tax hit.

To get the full benefit of the tax-loss selling strategy, you have to act before year-end. Elenathewise/Fotolia

We hear a lot about “tax-loss selling” around this time of year. That’s the tax technique of using investment losses against capital gains to cut your overall tax hit.

And with the big run-up of U.S. stock markets through 2013, investors may be looking for ways to do just that. But to get the full benefit of this strategy, you have to act before year-end. Here’s how it works.

Current Year Losses

If you had capital losses this year to offset your capital gains, the claim is mandatory. You must first of all claim any 2013 losses against 2013 gains. Remember, too, that use of tax losses to offset capital gains is not available in registered plans like RRSPs and TFSAs. The tax-loss selling technique works only for non-registered, non-tax-sheltered accounts.

Losses Carried Back

You can carry unused capital losses back three years. That means if, after applying this year’s losses against this year’s gains, you still have losses left over (and you had taxable capital gains for the 2010 to 2012 tax years), you can carry back those losses to offset those previous years’ capital gains.