The process of selling stocks that have experienced a loss over the past year in order to mitigate tax obligations is known as tax-loss selling or tax-loss harvesting. It’s a method utilized by investors to offset capital gains tax responsibilities. To gain the maximum benefit from this strategy, it’s crucial to mark key tax-loss selling dates on your calendar.
The first significant date falls typically on December 15th. In the United States, the last date to realize losses for tax purposes tends to be December 31st of the calendar year. However, because it takes two business days for a trade to settle, transactions need to be completed at least by December 29th, 2024.
Next is the date for Settlement. It is equally critical to understand the settlement date when executing your tax-loss selling plan. The settlement date is the day when the transaction is considered legally binding, which is typically two business days after the trade date (T+2). With broader markups and volatile markets, you may want to initiate your trades a few days earlier to secure the most beneficial price.
Moreover, in Canada, the deadline for carrying out your tax-loss selling actions is December 24th, 2024, because December 26th is a statutory holiday, and December 25th is a non-settlement day. Therefore, Canadian investors need to comply with the dates that fall earlier than those of their American counterparts.
However, American Mutual Fund investors need to pay attention to another date as well: The ex-dividend date. Before this date, the mutual fund company determines the investor’s eligible dividend. Thus, to take advantage of this, you must own the fund before the ex-dividend date.
In addition to these crucial dates investors should mark on their calendars, being cognizant of specific tax implications is essential. For instance, in the U.S., if you sell a security at a loss and then purchase the ‘substantially identical’ security within 30 days, before or after the sale, the IRS will disallow your claim to the tax loss due to the ‘wash-sale’ rule.
Furthermore, to benefit more from tax-loss selling, investors should follow first-in, first-out (FIFO) rule when selling shares, therefore, the longest-held shares are sold first.
Lastly, bear in mind that tax-loss selling must also align with your long-term investment objectives and not be solely driven by the endeavor to limit tax liabilities. If you own an underperforming stock with poor perspectives, indeed it makes sense to sell. But in case you believe in its future perspective, consider cautiously whether selling for potential tax benefits overrides the potential long-term gains.
In sum, knowing the exact dates for your tax-loss selling strategy is key to efficiently managing and optimizing your tax liabilities. By appropriately marking these dates—December 15th, the settlement date, the ex-dividend date, among others—you give yourself a valuable advantage in your end-of-year tax planning strategy.
