# Tax loss selling early in year?



## james4beach (Nov 15, 2012)

This year, I realized a 10k capital gain on a stock. I'm now wondering if this crash presents an opportunity to do tax loss selling to wiggle my way out of paying those capital gains taxes. I am currently down on a SPY position. I am thinking of doing these steps:

- sell SPY, realize a capital loss
- buy SCHX immediately, to keep the same exposure
- now my 10k cap gain can be reduced by the SPY loss

SPY tracks the S&P 500 whereas SCHX tracks Dow Jones U.S. Large-Cap Total Stock Market Index

In reality the two prices move almost identically, but they are different indexes. Would the CRA permit me to keep the capital loss on SPY if I immediately buy SCHX?

This seems too easy, so what are other reasons to not do this?


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## AltaRed (Jun 8, 2009)

james4beach said:


> In reality the two prices move almost identically, but they are different indexes. Would the CRA permit me to keep the capital loss on SPY if I immediately buy SCHX?
> 
> This seems too easy, so what are other reasons to not do this?


Yes. You can actually buy another S&P500 ETF from any other provider. Whether you actually do it or not is entirely up to you. It would have to be material, e.g. significant 4 digits, for me to be motivated to do so.


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## james4beach (Nov 15, 2012)

AltaRed said:


> Yes. You can actually buy another S&P500 ETF from any other provider. Whether you actually do it or not is entirely up to you. It would have to be material, e.g. significant 4 digits, for me to be motivated to do so.


Thanks. I see, so maybe I'll wait to see if the losses get larger before bothering to do this.

You said I could buy another S&P 500 ETF but, I thought that would violate the Superficial Loss Rule? When you trigger a loss, I thought there are some +/- 30 day time constraints before you can purchase the identical security. This CIBC resource says: index funds which track the same index would be considered "identical securities"

Therefore I thought it would not be permitted to sell SPY and immediately buy IVV (same index)
Whereas perhaps sell SPY and immediately buy SCHX (different index) is OK?

Have I misunderstood the superficial loss rule?


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## AltaRed (Jun 8, 2009)

There have been threads discussing this in the past, maybe not in this forum, that says one can do so because every provider has something that is just a bit different, e.g. MER, sampling of securities rather than all securities, etc. IOW, not identical securities. However, in googling.... you may be right!

https://business.financialpost.com/personal-finance/are-two-etfs-identical-under-30-day-rule says you can.

https://www.moneysense.ca/columns/tax-loss-selling-with-canadian-etfs/ says you cannot

https://www.adjustedcostbase.ca/blog/what-is-the-superficial-loss-rule/ says you cannot

https://www.advisor.ca/columnists_/jamie-golombek/year-end-tips-for-tax-loss-selling/ says you cannot

https://www.advisor.ca/my-practice/...-listed-etfs-to-defer-taxes-on-capital-gains/ says you cannot

I am aware of a number of folk who have bought back the same index in the past with no apparent back blow....but that may be because it simply falls beneath the radar, i.e. CRA does no correlations over the years such as SPY is sold this year and IVV is bought to replace it, but is not sold for many years into the future. 

I suppose the safe methodology would be to do what you are suggesting....if doing it at all.


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## james4beach (Nov 15, 2012)

Interesting. I'll read those links.

I don't think I have a large enough loss yet to make this worthwhile, but still an interesting tax saving idea.


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## james4beach (Nov 15, 2012)

This idea is looking more feasible now. Thought I'd remind others of it as well.

For example, XIU and XIC track different indexes as well. It should be legitimate to sell XIC and realize a capital loss, while immediately buying XIU. Yes they are different portfolios but historically are quite similar.


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## peterk (May 16, 2010)

james4beach said:


> This idea is looking more feasible now. Thought I'd remind others of it as well.
> 
> For example, XIU and XIC track different indexes as well. It should be legitimate to sell XIC and realize a capital loss, while immediately buying XIU. Yes they are different portfolios but historically are quite similar.


That must be legit. They are definitely different portfolios.


I can't recall - Carrying forward losses "indefinitely" just means that that the loss doesn't expire, correct? You still *need* to use it against gains at the earliest opportunity available, i.e. next year probably, right? You can't just elect to carry forward to future years (in the far future) while booking capital gains in the interim years, right?


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## james4beach (Nov 15, 2012)

I did my tax loss selling yesterday. The losses had grown large enough to have an effect on my taxes.

Earlier this year I sold BRK.B with a $10k cap gain.
Then I had a $3k cap loss from another position.

Yesterday, I sold SPY and realized a $4k cap loss.
I immediately bought a similar, but not identical, ETF with the same amount of money.

So this nearly wipes out my cap gains for the year, reducing the 2020 tax bill.

The similar ETF which I immediately bought maintains just about the same US stock exposure.


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## james4beach (Nov 15, 2012)

Feeling very good about this move. On the S&P 500, realized a 28% capital loss on *the day* the market hit its low (assuming we've now seen the bottom). Basically rotated at the perfect time into an equivalent vehicle and am now up 16%.

This also reduced my foreign holding amount, which let me reset my cost basis below the 100K threshold on T1135 for a double win.

Doesn't get better than this. The fun of trading the market with zero negative consequences, all tax benefits.



peterk said:


> I can't recall - Carrying forward losses "indefinitely" just means that that the loss doesn't expire, correct? You still *need* to use it against gains at the earliest opportunity available, i.e. next year probably, right? You can't just elect to carry forward to future years (in the far future) while booking capital gains in the interim years, right?


Yes the loss does not expire. They include a note in each year's Notice of Assessment telling you what your unused carry-forward loss is. I think you might have to use a loss in the current year (if the current year has gains) but if your loss exceeds the current year's gains, I think then you get to carry it and can elect to plop it back in (claim the loss) at your leisure. But I'm not totally clear on how this works.


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## agent99 (Sep 11, 2013)

james4beach said:


> Doesn't get better than this. The fun of trading the market with zero negative consequences, all tax benefits.


James, sounds like you have become a daytrader/Market timer ....... ??????


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## Eclectic12 (Oct 20, 2010)

peterk said:


> ... I can't recall - Carrying forward losses "indefinitely" just means that that the loss doesn't expire, correct?
> 
> You still *need* to use it against gains at the earliest opportunity available, i.e. next year probably, right? You can't just elect to carry forward to future years (in the far future) while booking capital gains in the interim years, right?


Once it's a carry forward ... it's up to you, the tax payer to decide when to use it.

I have a bunch of CL that I haven't used yet as my other credits mean I can keep saving them for when I sell something for a CG.

The place on is forced to use the CL is in the year it is recorded.


Cheers


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## gardner (Feb 13, 2014)

james4beach said:


> Feeling very good about this move. On the S&P 500, realized a 28% capital loss on *the day* the market hit its low


This would have been partly offset by the currency gain as the US$ moved against C$ in the same period.

I never went underwater on my VTI, so I didn't try to make the same play. I AM underwater on VEA and should consider swapping for something else to harvest the losses. Even doing a swap would have a currency effect since my $US cash ACB would rise on the sale. I am also unsure what I would swap INTO. Maybe convert to $C and ZEA? Then I would be taking a currency gain that would undo some of the loss.


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## cainvest (May 1, 2013)

agent99 said:


> James, sounds like you have become a daytrader/Market timer ....... ??????


J4B a day trader??? Maybe when Sus scrofa learn to fly!


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## james4beach (Nov 15, 2012)

gardner said:


> This would have been partly offset by the currency gain as the US$ moved against C$ in the same period.


That's a good point, that 28% loss was in USD. In CAD terms (which is what matters) the loss was milder, only 21% but still enough to give me the tax loss I wanted.



gardner said:


> I AM underwater on VEA and should consider swapping for something else to harvest the losses. Even doing a swap would have a currency effect since my $US cash ACB would rise on the sale. I am also unsure what I would swap INTO. Maybe convert to $C and ZEA?


VEA appears to track EFA quite closely. This was simply my first guess but I might have hit on a good one for you. Both the 6 month and 1 year returns are about identical for both:

VEA tracks: FTSE Developed All Cap ex US Index
EFA tracks: MSCI EAFE Index

You could also check their country % weightings to confirm that they are similar enough. But based on the charts, I think they are equivalent.

These track different indexes so I don't think they are identical securities and I believe there would be no superficial loss rule. I am not a tax expert.


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## gardner (Feb 13, 2014)

james4beach said:


> EFA tracks: MSCI EAFE Index


Excellent idea. I like this EAFE because it still excludes Canada, which VEA no longer does. Thank you.


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## james4beach (Nov 15, 2012)

gardner said:


> Excellent idea. I like this EAFE because it still excludes Canada, which VEA no longer does. Thank you.


Glad I could help. There is a difference in MER, but you can always switch back to the other at some point.


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## scorpion_ca (Nov 3, 2014)

Sorry to hijack this thread...

In 2019, I sold a share of ZPR for $10.22 in my cash account. The ACB was $12 and the proceeds of disposition was $5 after commission ($5). The reason of selling one share was to get the reward from the Questrade. My account is set up for DRIP and I receive additional shares every month. I got an alert on Adjustedcostbase about the superficial loss rule and it shows zero amount for capital loss instead of $7.

I use Studio Tax to prepare my income tax and imported all documents from the CRA website. See below T5008. ST calculated $3.5 capital loss in 2019. I didn't sell any other share last year and don't have any CG either.

Should I manually override Box 21 from $5 to $12 due to superficial loss rule or leave it as is? If I override, will it make any problem since CRA received different amount from the QT. Or do I need to allow capital loss of $7 on Adjustedcostbase? Based on my ACB tracking on Adjustedcostbase, the ACB is $12.20 but QT shows $12. Should I modify it? It would not make any sense for a share but it would for thousands of shares.

Please advise. Thanks.


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## kcowan (Jul 1, 2010)

James, remember that your 1135 cost basis is set on January 1st for the year.


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## gardner (Feb 13, 2014)

scorpion_ca said:


> Should I manually override Box 21 from $5 to $12 due to superficial loss rule or leave it as is?


Interesting. I think the right thing to do is to manually calculate the correct CG/loss on Schedule 3 and disregard the T5008. This is what I do because the T5008s I get are generally wrong in one way or another -- usually because of currency issues. If you really did get extra shares via DRIP soon after selling, then you have a superficial loss alright, and disregarding the T5008 is probably the right thing to do.

On the other hand, it is very unlikely the CRA will realize the issue or care about the $5 loss. This would result in ~$1 net change in your taxes and would be well below their threshold to refund or demand payment. I think they would tend to trust the T5008 and would simply accept it if you just went ahead and reported it naively.


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## scorpion_ca (Nov 3, 2014)

gardner said:


> Interesting. I think the right thing to do is to manually calculate the correct CG/loss on Schedule 3 and disregard the T5008. This is what I do because the T5008s I get are generally wrong in one way or another -- usually because of currency issues. If you really did get extra shares via DRIP soon after selling, then you have a superficial loss alright, and disregarding the T5008 is probably the right thing to do.
> 
> On the other hand, it is very unlikely the CRA will realize the issue or care about the $5 loss. This would result in ~$1 net change in your taxes and would be well below their threshold to refund or demand payment. I think they would tend to trust the T5008 and would simply accept it if you just went ahead and reported it naively.


How do you calculate and report CG/CL manually when you use software to prepare your income tax unless you modify it on T5008?

Although I sold it on Mar 4, 2019, I got more shares via DRIP on Feb 27 and Mar 4, 2019. I even bought some shares on Mar 28, 2019. I understand that CRA may not come for $3.5 CL but I want to make sure that I am filing my taxes in a proper way. This is a learning opportunity for me.


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## Eclectic12 (Oct 20, 2010)

In my case, I'd don't download any of the forms so to do it manually, I enter my details to Schedule 3, Part 3 and don't enter anything T5008.

If I had a T5008 in the tax return due to something like using the auto-fill feature, I'd delete it and manually fill out Schedule 3.


Cheers


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## scorpion_ca (Nov 3, 2014)

Eclectic12 said:


> In my case, I'd don't download any of the forms so to do it manually, I enter my details to Schedule 3, Part 3 and don't enter anything T5008.
> 
> If I had a T5008 in the tax return due to something like using the auto-fill feature, I'd delete it and manually fill out Schedule 3.
> 
> ...


Should I claim $3.5 CL or make it zero due to superficial loss rule?


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## gardner (Feb 13, 2014)

scorpion_ca said:


> Should I claim $3.5 CL or make it zero due to superficial loss rule?


If you're going to the trouble of bypassing the T5008, it is because you want to NOT report the superficial loss -- it is going to be reported as 0 net and would instead affect your ACB which you will have to remember and carry forward for when you DO sell. And, once again, the T5008 at that time will also be wrong.






What is a superficial loss? - Canada.ca


What is a superficial loss?




www.canada.ca


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## james4beach (Nov 15, 2012)

james4beach said:


> Yesterday, I sold SPY and realized a $4k cap loss.
> I immediately bought a similar, but not identical, ETF with the same amount of money.
> 
> So this nearly wipes out my cap gains for the year, reducing the 2020 tax bill.


I'm so happy about this trade. Probably the best single trade I've made in years, and just about no risk because it was a guaranteed tax win.

Here's how the replacement position looks today. Up 91% on the US index since buying at what turned out to be exact market bottom. So I got my capital loss, while keeping US exposure, and didn't harm the portfolio at all.


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