Is It Time To Take Advantage Of Tax-loss Selling?

Is it Time to Take Advantage of Tax-loss Selling?

Last week's news that German gold stock newsletter writer Oliver Gross has dumped everything in his portfolio — with the hope of buying it back when the market is stronger — has many investors wondering whether they should do the same.

And why shouldn't they consider that? After all, the gold spot price is down 5.16 percent year-to-date, and many gold companies aren't faring particularly well either — especially since the end of September. Silver, which many gold miners also produce, is having an even harder time this year having seen a year-to-date fall of 20.53 percent.

It's against that background that Dundee Capital Markets has released a report suggesting that investors take a variation on Gross' strategy: "sell today, buy back in December."

The strategy

The report, published Tuesday, reminds investors that the period leading up to December 31 is "the season for tax-loss selling."

What does that mean? Speaking this time last year to The Globe and Mail, Tim Cestnick, president of WaterStreet Family Offices and author of a number of tax and personal finance books, explained, "[t]axes need to be thought about throughout the year, but for sure in the last three or four months of the year, there are opportunities that may arise to save some tax."

Expanding further, the news outlet notes that while buying stocks low and selling them high is "ideal," sometimes that's not an option. In such cases, it's possible for investors to "sell shares held in a non-registered account that have dropped in value — thus incurring a loss when sold" and then use that loss to "offset other capital gains incurred throughout that year."

The Globe adds, "[t]he loss can be carried forward indefinitely and can also be used on capital gains incurred in the last three calendar years."

That might sound complicated, but the news outlet provides an example that helps clear things up: if an investor bought 1,000 shares of a company for $53 each, they could sell the shares and take a loss of $3,000 in the event that they declined in value to $50 each. The $3,000 gained from the sale could then be used to offset gains elsewhere in the investor's portfolio.

The catch

Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management, told The Globe and Mail that tax-loss selling is fairly simple "if it's a straight-up sale and the owner has no desire to own the stock again."

However, it becomes more complicated when investors want to sell stocks in order to "have tax-loss harvesting benefits in the coming tax year," but then buy back them back in hopes of future gains. That's because under the Canada Revenue Agency's Income Tax Act, investors are not allowed to immediately repurchase shares they have sold and in fact will be denied "the tax loss if the same property is repurchased within 30 days."

There are ways to get around that, according to Golombek, but most investors will need a financial expert to help them navigate that arena.

Dundee's suggestion

Going back to Dundee's report, the firm's main point is that despite the recent sell off in the precious metals space, which "suggests that some [investors] may have already started selling their underperformers," further selling is likely in the cards "as investors rebalance heading into the year-end."

As such, Dundee has put together a list of stocks it covers that it considers targets for tax-loss selling, breaking them into two categories: those with negative year-to-date returns and those that are down "significantly" from their 52-week highs.

The top five in the first category are: Coeur Mining (NYSE:CDE), Belo Sun Mining (TSX:BSX), Yamana Gold (TSX:YRI,NYSE:AUY), Kinross Gold (TSX:K,NYSE:KGC) and First Majestic Silver (TSX:FR,NYSE:AG). The top five in the second are much the same: Belo Sun Mining, Coeur Mining, Continental Gold (TSX:CNL), Yamana Gold and IAMGOLD (TSX:IMG,NYSE:IAG).

Summing up its opinion, the firm states, "we think it makes sense for investors to consider trimming underperformers today before the rest of the market begins selling during the more typical tax-loss selling period (i.e. December). In doing so, we believe investors may be able to obtain better prices on disposition. As the broader market commences tax loss selling in late-Nov. & Dec., we believe the broader selling pressure and reduced liquidity could create an opportunity for investors to deploy capital back into gold & silver equities at attractive valuation."

In short, get out now, then get back in ahead of the crowd.

Investor takeaway

Tax-loss selling certainly has advantages in some situations, but it's important for investors to keep in mind Golombek's reminder that it can be tricky, especially for those with plans to repurchase stocks in the near term. As Dundee states, investors interested in giving it a try would do well to "refer to their own tax advisers" for tailored advice.


Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

Related reading:

When the Streets Get Too Bloody: Oliver Gross Dumps Gold Stocks

Is it Time to Take Advantage of Tax-loss Selling? from Gold Investing News