Tax season is just around the corner. Some of us might have received the tax slips for our investment accounts. Naturally, we are thinking how to optimize the tax.
An article mentioned something called “Tax loss harvesting” strategy. The names sounds very sophisticated. Good branding. 😉 Basically, it is to sell a security lower than its book value to create capital loss. Then, buy it back right away. Hence, there is capital loss to be used later to reduce capital gain tax but there is no actual loss because the securities have been bought back already probably at similar price.
Is it legal? This feels like a wash trade. Please check out this article here. The rule is that we are not allowed to buy the same or similar security within 30 days. However, the harvesting strategy still suggests to skirt that by buy other close related securities. I am not sure about that personally.
One rule I want to live by is to keep it simple. Using complicated schemes in grey areas can be dangerous. I’d rather just pay the capital gain tax.
By the way, this doesn’t apply to RRSP or TFSA that most of us use because the capital gain, dividend or interest generated withing those accounts are tax deferred for RRSP or exempted for TFSA. We don’t receive an annual tax slip for the trade we did inside those accounts. It only applies to the non-registered account or so-called margin accounts.
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