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With volatile markets, rising inflation and a potential economic slowdown, 2022 has proven to be a challenging year for investors. Exchange traded funds (ETFs) are effective tools for investors to help navigate these uncertain markets and can be used to help crystallize losses from a tax perspective. As 2022-year end approaches, this article provides trade ideas to help you harvest tax savings from under-performing securities.
What is Tax-Loss Harvesting?
By disposing of securities with accrued capital losses, investors can help offset taxes otherwise payable from securities that were sold at a capital gain. The proceeds from the sale of these securities can then be reinvested in different securities with similar exposures to the securities that were sold, in order to maintain market exposure.
- Realized capital gains from previous transactions can be offset by selling securities, which are trading at a lower price than their adjusted cost base.
- Investors can then use the proceeds from the security that is sold to invest in a different security, i.e. BMO Exchange Traded Funds (ETF).
- In addition to common shares, tax-loss harvesting can also be applied in respect of other financial instruments that are on capital account, such as bonds, preferred shares, ETFs, mutual funds, etc.
Considerations:
If capital gains are not available in the current year, the realized losses may be carried back for three years to shelter gains realized in those years or carried forward to reduce capital gains in upcoming years.
