What is Tax-Loss Selling?

Updated December 2024

Tax-loss selling, or tax-loss harvesting, is a strategy that allows investors to use investment losses incurred in their non-registered accounts to offset the taxes on taxable capital gains.

The strategy involves selling underperforming investments – they could be stocks, bonds, mutual funds and exchange-traded funds (ETFs) – and using the capital loss to offset any capital gains realized that tax year. (You can also apply losses against gains from the three prior tax years or carry them forward indefinitely to counter gains in future years.)¹

Many investors deploy this strategy near the end of the calendar year, as that’s often the time when people start thinking about ways to mitigate the current year’s tax hit. It’s also a natural time to review and consider rebalancing a portfolio.

Sales of securities must also settle within the calendar year for it to offset capital gains realized in the same year (or from the previous three years). Be mindful that your sell trade settles in the calendar year: as of May 2024, most trades now settle within one day instead of two, but with markets closed on Christmas and Boxing Day and with a weekend often falling before New Year’s Eve, if you’re not paying attention, from the CRA’s perspective you could end up accidentally settling that trade in the next calendar year.

When a loss isn’t a loss

If you’re thinking about dropping a company to realize a loss and then buy it back the next day, think again. The Superficial Loss Rule² states that you can’t deduct the capital loss if you buy (or purchase a right to buy) an identical security within 30 days of the settlement date of your sale transaction. This means you can’t buy the asset 30 days before or 30 days after your settlement date. Violating the rule means your tax benefit would effectively be cancelled. The rule also states that “affiliates" can’t make a purchase. That includes a spouse or common-law partner or a corporation you or a spouse controls.

As to what an identical security³ means, that’s shares in the same company you just sold, units of the same ETF or mutual fund, or a competitor ETF or mutual fund that invests in the exact index you owned.

That doesn’t mean you can’t hold a stock or fund that invests in a similar stock or sector, or a fund that holds a stock you just sold. For instance, say you sold an energy-sector stock; you can purchase an energy sector ETF that holds that same company. You can also buy another energy stock that may have similar properties and fundamentals to the one you sold. You just can’t repurchase the exact same asset.

Important factors to keep in mind

When it comes to tax strategies, it is critical to remember that circumstances vary from individual to individual. While no set of guidelines applies to every investor, investors should keep a few things in mind.

First, consult with a tax specialist before planning or enacting a tax-loss strategy. It’s also a good idea to monitor end-of-year deadlines for completing a tax-loss sale to ensure the transaction is completed before the year ends (if that’s what you want).

To make sure you’re not running afoul of the superficial loss rule, check your recent transaction history under Trade & Transfer > Transactions > View Activity to confirm your transactions over the past 30 days (and more).

Do the math, too. Any potential capital gain distributions paid by a particular ETF or mutual fund during the year may offset some, or all, capital losses harvested.

Saying all that, tax loss selling is a strategy that people who own assets in a non-registered account have employed for years. Talk to an expert to make the most of it.


^1. _{Source: Government of Canada, “How do you use a capital loss”, January 2024}

^2. _{Source: RBC Wealth Management, “Tax-loss selling – building a better understanding”, 2024}

^3. _{Source: RBC Global Asset Management, “Turning losses into tax advantages”, 2024}

The information provided in this article is for general purposes only and does not constitute personal financial or tax advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.

A version of this article was originally published by RBC Global Asset Management.