Determining the 61-day period
The 61-day period includes the settlement date of the sale as well as the 30 calendar days before and after the settlement date. We suggest first using a calendar to determine the settlement date of the sale: in the case of an ETF this is T+3, or three business days after the trade. (When determining settlement dates, do not include weekends or holidays when the Canadian stock markets are closed.)
Once that is done, shade in the 30 days before and 30 days after the settlement date. Ensure all purchases of the identical security settle outside of this 61-day period (unless you plan on selling the shares before the end of the 61-day period).
Example. You purchase 5,000 shares (at $20 per share) of the iShares MSCI Emerging Markets IMI ETF (XEC) for $100,000 in your non-registered account on April 10, 2013. On June 11 your holding is now worth $93,700, so you sell your 5,000 shares (at $18.74 per share) and immediately purchase 3,850 shares (at $24.34 per share) of the Vanguard FTSE Emerging Index ETF (VEE) for $93,700.
The transactions would settle on June 14 (T+3). The 61-day period would run from May 15 to July 14 (30 calendar days before and after the settlement date). You would therefore have been able to buy XEC anytime on or before May 9, as the trade would have settled on May 14, a day before the 61-day period began. You would also be free to repurchase XEC anytime on or after July 10, as the trade would settle on July 15, a day after the 61-day period ends. But any purchases during this window could trigger a superficial loss if the shares are still held at the end of the period.
So to stay within the rules, you sell 3,850 shares (at $24 per share) of VEE on July 10 and receive proceeds of $92,400. You immediately purchase 5,000 shares (at $18.48 per share) of XEC for $92,400. The trades both settle on July 15 (T+3).
May 9: Last day to purchase XEC within 61-day period
May 14: Settlement date for May 9 transaction
June 11: Sold 5,000 shares of XEC to crystallize capital loss
June 14: Settlement date for June 11 transaction (61-day period is 30 days before and 30 days after this date)
July 10: XEC can be purchased on this day or later
July 15: Settlement date for July 10 transaction
|Date||Transaction||Security||Shares||Price/Share||Market Value||Realized Gain/Loss|
|April 10, 2013||Bought||XEC||5,000||$20.00||$100,000|
|June 11, 2013||Sold||XEC||5,000||$18.74||$93,700||-$6,300|
|June 11, 2013||Bought||VEE||3,850||$24.34||$93,700|
|July 10, 2013||Sold||VEE||3,850||$24.00||$92,400||-$1,300|
|July 10, 2013||Bought||XEC||5,000||$18.48||$92,400|
Notice that emerging markets equities continued to fall in price during June and July, so the sale of VEE resulted in an additional capital loss of $1,300. In other cases, markets may recover during the 30 days after the replacement ETF is purchased, in which case selling it would trigger a capital gain.
Application of the superficial loss rule (30 calendar days prior to settlement date)
Suppose you and your spouse keep separate finances. On May 31, 2013 (during the 30 days prior to your original disposition), your spouse purchases 5,000 shares (at $19.85 per share) of XEC for $99,250 in his or her non-registered account and continues to hold them on the day your 61-day period ends. This transaction would cause your entire loss to be denied, and your spouse would be required to add your $6,300 superficial loss to his or her adjusted cost base, increasing it to $105,550 ($99,250 + $6,300).
When should you sell your losers?
Many investors—and advisors—pay little attention to tax loss selling until the end of the year. By doing
so, they miss opportunities that arise from market downturns throughout the year. Consider an investor who purchased $100,000 of the Vanguard FTSE Emerging Index ETF (VEE) on February 28, 2012. VEE was down for most of the year, but at the beginning of December it made an impressive recovery. The investor could have crystallized a loss of more than $11,000 in August, but by the end of that year the opportunity had vanished. That’s why we recommend keeping an eye on your non-registered accounts all year round, not just in December.
|Date||Market Value $|
|February 28, 2012||$100,000|
|March 30, 2012||$97,221|
|April 30, 2012||$94,311|
|May 31, 2012||$88,155|
|June 29, 2012||$91,252|
|July 31, 2012||$90,058|
|August 31, 2012||$88,808|
|September 28, 2012||$92,035|
|October 31, 2012||$92,986|
|November 30, 2012||$93,677|
|December 31, 2012||$99,347|
Source: Vanguard Canada
In his book, The Only Guide You’ll Ever Need for the Right Financial Plan, Larry Swedroe suggests two requirements that should be met before engaging in tax loss selling. We use similar guidelines with our clients, though you can adapt them to your own preferences:
- a minimum dollar loss on the security of $5,000, and
- a minimum percentage loss on the security of 5%
Example. Suppose you own the iShares MSCI Emerging Markets IMI ETF (XEC) in your non-registered account and your holdings currently show the following:
|Symbol||Quantity||Current Price||Market Value||Book Value||$ Gain/Loss||% Gain/Loss|
Your holding has a dollar loss of $6,300 (calculated as Market Value minus Book Value). This loss exceeds our minimum threshold of $5,000. XEC also has a percentage loss of 6.30% ($ Gain/Loss divided by Book Value). This loss also meets our minimum threshold of 5%.
Since both requirements have been met, you could sell 5,000 shares of XEC and immediately purchase an equivalent amount of the Vanguard FTSE Emerging Index ETF (VEE) to realize the loss and maintain your exposure to emerging markets equities. After 30 calendar days, you can switch back to your original holding.
Underperformance of replacement ETF
In our example above, from June 11 to July 10, the performance of XEC and VEE differed by just a single basis point (–1.39% versus –1.40%). That is an ideal result, but things don’t always work out so well. There is always a risk the replacement ETF will significantly underperform the original ETF during the 30 calendar days after the switch. This is most likely to occur when the two ETFs track significantly different indexes: for example, if one index tracks the broad market and the replacement tracks only large-cap stocks. It’s even possible that the replacement security will lag by a large enough amount that the tax benefit will not make up for the underperformance.
Of course, the relative difference in performance is just as likely to work in your favour: the replacement ETF could outperform the original during the 30 days after the switch.