In this article:
Overview
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 to save money on your taxes. It's available in non-registered accounts only, either in a managed portfolio for Premium and Generation clients, or through Direct Indexing in an Automated Investing account.
Eligibility
Tax-loss harvesting is available in non-registered accounts only. There are two ways to get it:
- Wealthsimple Premium and Generation clients: Tax-loss harvesting is available in your managed investing accounts. You turn it on yourself in your profile settings.
- Automated Investing clients: Tax-loss harvesting runs inside Direct Indexing. If your Automated Investing account holds at least one direct index, it happens automatically. If your account holds only stocks, ETFs, or a Collection, tax-loss harvesting doesn't apply to it.
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 end 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 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 isn't the right tool for your investment portfolio.
Tax-loss harvesting may also be ineffective if you have a spouse who also invests due to the potential of violating the superficial loss rule. Learn more about tax-loss harvesting.
When to consider tax-loss harvesting
Tax-loss harvesting tends to be most useful 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, and either you're a Premium or Generation client or your Automated Investing account holds at least one direct index
If you're curious whether tax-loss harvesting is the right strategy for your portfolio, contact our support team to see if one of our experienced advisors can help you figure it out.
Turn tax-loss harvesting on or off
Premium and Generation clients can turn tax-loss harvesting on or off in their Wealthsimple profile.
Follow these steps to turn on tax-loss harvesting:
- Log in to your Wealthsimple profile
- Select the Profile menu in the bottom left corner
- Choose Settings (the gear icon) from the menu
- Select Investments from the options
- Select Tax-loss harvesting
- Use the toggle to enable or disable tax-loss harvesting
Frequently asked questions
Why isn't tax-loss harvesting running in my Automated Investing account?
Tax-loss harvesting runs inside Direct Indexing. If your account holds only stocks, ETFs, or a Collection, there's nothing for it to work on. Adding a direct index in a non-registered account is what starts it.
Do I need to turn tax-loss harvesting on for Direct Indexing?
No. It runs automatically in Automated Investing accounts that hold at least one direct index. The setting in your profile applies to Premium and Generation managed portfolios only.
What happens if I remove my last direct index?
Tax-loss harvesting stops on that account. It starts again if you add a direct index back in a non-registered account.
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