What is tax loss harvesting?
Tax loss harvesting is a strategy that uses investment losses to create tax savings. The idea is to purposely sell investments that have gone down in value so that you realize losses on investments in order to save money on your taxes.
It's only available to Wealthsimple Premium clients and is a little complicated, so you may want to read up on our Investing 101 page.
When tax loss harvesting doesn't make sense
Tax loss harvesting can have an adverse effect if you’re not going to keep your money invested for a long time, or if you start earning more in the future and move to a higher tax bracket.
The primary benefits come from deferring taxes, so if you defer to a time when you are taxed at a higher rate, you can actually wind up paying more in taxes than you would have if you hadn’t turned on tax loss harvesting.
The strategy also benefits from a long time period to play out over; the longer you can keep those deferred capital gains taxes invested, the better. If you know that you have a large withdrawal, like a home down payment, coming up, then it’s likely that tax-loss harvesting is not the right tool for your investment portfolio.
OK, so when should I use tax loss harvesting?
Tax loss harvesting is generally the right strategy for your portfolio if:
- Your annual income is above $100,000
- You don't plan on making a large withdrawal in the next 12 months
- You're invested in a non-registered account
If you're curious whether tax loss harvesting is the right strategy for your portfolio, submit a request and one of our experienced portfolio managers will help you figure it out.