[CAN] Benefits of Tax Loss Harvesting?

[Blissful Biker]

With the drop in the markets I am considering executing tax loss harvesting for the first time.  I understand the mechanics of it but am struggling to understand the net benefit.  Selling now would provide capital losses to offset future capital gains, but the value of those future capital gains would be substantially increased because you reset the starting point.  So what's the net benefit?



Thanks.  Appreciate any input.

[Lews Therin]

An example in which it would be helpful:
harvest for 20k (mutiple years of losses.
A higher income year due to the sale of a rental home, cancel some of that with that 20k
Sell the rest of the investments at a slower rate.

More optimal if you have a one time high tax rate capital gain coming up.

[FIRE Artist]

Several years back I was able to harvest some losses and since then I have been using the loss credit to cover the unrealized capital gains from the ETF management.  This has been useful as I am still working so the tax rate would be at the highest rate I ever expect to have to pay income tax at, it also avoids my having to either use my cash flow or sell stock to cover the tax obligation. 

[techwiz]

I have struggled with this concept too.

I have read about how robo investors can take advantage of tax loss harvesting automatically.  When I looked into how all that worked all I found was marketing BS. In theory it could provide more benefits than my buy and hold forever plan, but I worry about having bad timing. You could win and tax harvest missing the next big drop and get back in at the lower value, or have bad luck and being out of the market just as a quick rebound/recovery happens. In my situation looking at the benefits and risks I decided it didn't make sense to tax loss harvest just because I can.  I also saw it as the slippery slope that could lead me to the evils of market timing.   

I believe Lews Therin is correct that it is optimal to use tax harvesting in certain use cases, if I found myself in one of those I would reconsider.   

[Heckler]

After two years of buying VCN in my partner's unregistered account, I've finally figured out the ACB per share (round numbers below).

ACB has increased from $30 to $38 per share over 10 Buy events.  With today's price of $41, there is still a $3 per share capital gain if they were to sell today.  Am I right?

If so, this shows that indexing and buying the average works, and there's no TLH available for them, until the price drops below $38.

[Heckler]

Selling now would provide capital losses to offset future capital gains, but the value of those future capital gains would be substantially increased because you reset the starting point.  So what's the net benefit?

I'm still trying to figure this out too.  Here's my take.

In my example above, if VCN were to drop to $37 today and we TLH sell all VCN shares, the capital loss is $1 per share.   The new fund VDY would then be purchased at today's VDY price, which is similar in market conditions as VCN (in fact 6 of the top 10 holdings are the same).   

The ACB of the new fund resets to today's VDY price (call it $37 market condition), and the future capital gain (say they are sold at $45 next year, it's a gain of $8 per share) is similar, but I now have a $1 per share capital loss to subtract from future capital gains (so only $7 per share gains to pay taxes on)

[Lews Therin]

Heckler that is correct. But you don't have to use it immediately.

[Heckler]

sick, thanks! I just let my accountant go, along with my financial adviser in 2012.


(no, we've never had an accountant, but it was almost starting to feel like it was time to get one)

[Blissful Biker]

Thanks for the feedback.  My situation is very simple with no real estate or other complications.  The only capital gains I might incur in the future would be selling ETFs in my taxable account, the same ETFs I am considering tax loss harvesting for.

If we continue with Heckler's example, summarized as: VCN with an ACB of $38 was sold for $37, harvesting a capital loss of $1/share.  VDY is then purchased at $37/share, grows to $45 and when sold the capital gain of $8 can be reduced by the capital loss of $1, thus incurring taxes on only $7.

To me it looks there is no net gain from this transition. Had he never sold the $38 VCN in the first place, a growth to $45 and subsequent sale would have still incurred taxes on $7 of capital gains.  The exact same end result.

So I think in my situation there is no benefit in tax loss harvesting, now or in the future.  Agree?

[Lews Therin]

There could be a very slight gain in the future, but indeed, sounds like it's not worth the effort.

(Maybe one year you have to sell a lot of ETFs because you have big renovations + Vacation, so that year you use the saved losses)

[Heckler]

https://canadiancouchpotato.com/2014/11/03/tax-loss-harvesting-revisited/

https://www.canadianportfoliomanagerblog.com/tax-loss-selling-results/

TLDR (yet)

[Lews Therin]

Hecklers tldr : nothing new.

You have all the info already in the thread.

[MustacheAndaHalf]

Selling now would provide capital losses to offset future capital gains, but the value of those future capital gains would be substantially increased because you reset the starting point.  So what's the net benefit?

Free money.  A bank will charge you interest to take out a loan.  But with tax loss harvesting, you're taking out a loan paid in a future tax bill.

Let's say you recognize a loss and get a $1000 tax benefit now, but will have to pay $1000 in extra tax later.  Between now and later, you can invest that $1000.  You get to decide when the loan comes due, and you owe no interest.

I would view tax loss harvesting as an interest free loan where you decide when it comes due.

[Goldielocks]

With the drop in the markets I am considering executing tax loss harvesting for the first time.  I understand the mechanics of it but am struggling to understand the net benefit.  Selling now would provide capital losses to offset future capital gains, but the value of those future capital gains would be substantially increased because you reset the starting point.  So what's the net benefit?



Thanks.  Appreciate any input.

Mainly its to smooth out the cash flow, especially when you collect gains this year from a terrific investment, maybe you don't want to pay that extra $8000 of taxes due NOW, you want to invest it or you have a current high income year and high tax bracket.

So you take some losses to balance it out and defer taxes down the road (a sound strategy, typically), but more so if "down the road" you are in a lower marginal bracket.