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Tax Loss Selling Results

October 31, 2014 - 0 comments

When life gives you lemons, make lemonade. That’s how our team in Toronto has been reacting to the recent market volatility. In the context of this common phrase, the lemons are the stock market losses and the lemonade is the deferred capital gains taxes. Shortly after announcing our company’s new tax loss selling software, we initiated the following tax loss selling trades for a few of our clients.

September 30: Switched the DFA Canadian Vector Equity Fund Class F (DFA600) to the DFA Canadian Core Equity Fund Class F (DFA256).

By switching from the primary fund to the secondary fund, we realized the capital losses while maintaining exposure to the Canadian stock market. The trades settled on October 1 (T + 1). **Note: Generally, ETF and stock trades settle on T+3**

October 2 to October 31:

During this 30 day period, we held onto the secondary fund (DFA256) in order to avoid the superficial loss rules (which would take effect if we switched back to the primary fund too early).   

One risk of switching from the primary fund to the secondary fund is that the secondary fund may lag the primary fund during the 30 day period. In this particular instance, the primary fund dropped by an additional 6.22% during the holding period, while the secondary fund only dropped by 4.03%. In other words, the clients received a boost in their returns because of the switch, which ended up being worth $1,429, $2,090 and $2,008 respectively (relative to if we had simply done nothing). Please keep in mind that the opposite scenario could have also occurred (which is why it is so important to choose secondary funds that have a low expected tracking error relative to your primary fund).

October 31: Switched the secondary fund (DFA256) back to the primary fund (DFA600).

As these trades settled on November 3 (T + 1), we avoided the loss being deemed as superficial. These trades also triggered more capital losses. I know it may sound like a sour outcome, but it simply allowed us to make more lemonade. In our opinion, a worse situation would have been if markets had fully recovered during those 30 days. Upon switching back to the primary fund, we would have triggered capital gains that may have offset some or all of the capital losses that we just realized.

By the end of the process, our three clients realized total capital losses of $8,013, $10,722 and $10,560 respectively. They can use these losses to offset gains in the current year, and then carry them back up to 3 years. If they have no gains to offset them with, they can carry them forward indefinitely. There was also the added benefit that the secondary fund outperformed the primary fund during the 30 day period.

By: Justin Bender with 0 comments.
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