Tax-loss harvesting means selling an investment that is worth less than you paid for it, in a taxable account, so the capital loss can be used against capital gains. Done carefully, your market exposure barely changes; what changes is the timing of tax. This page explains the mechanics, the superficial loss rule that shapes the trade, what happens to unused losses, and when harvesting does little. It is part of the investment tax hub.
How tax-loss harvesting works
- Find positions below their cost. Compare each holding’s market value with its adjusted cost base (ACB), not the broker’s book value, which can miss reinvested distributions and return of capital.
- Sell to realize the loss. The capital loss is the proceeds minus the ACB and any selling costs.
- Apply it against gains. Only part of a capital gain or loss is counted for tax: the inclusion rate, 50% for everyone. A loss is used against the same year’s gains first; using losses in other years covers what is left over.
- Stay invested, if you want to. Buying the same or identical property back within the superficial loss window cancels the loss for now, so one approach is to buy a similar but not identical investment, such as a fund from a different provider that tracks a different index. The ETF swaps section of the superficial loss guide covers how to choose one.
Example
An Ontario resident has $50,000 of interest income in the year (no employment income, so no CPP or EI) and has sold other investments for capital gains of $12,000. One holding is $5,000 below its ACB. The table compares not selling it with selling it before year-end, using 2026 federal and Ontario tax rates, including the basic personal amounts.
| Item | Without harvesting | With harvesting |
|---|---|---|
| Capital gains realized | $12,000 | $12,000 |
| Capital loss realized | $0 | −$5,000 |
| Net capital gain | $12,000 | $7,000 |
| Taxable capital gain (50% of the net gain) | $6,000 | $3,500 |
| Income for the year ($50,000 interest plus the taxable gain) | $56,000 | $53,500 |
| Federal plus Ontario income tax | $8,395 | $7,833 |
Harvesting the loss lowers this year’s tax by $562. If the proceeds go into a similar fund, that fund starts with a lower cost base than the one sold, so more of any future rise is a taxable gain when it is eventually sold: harvesting mainly moves tax later rather than removing it.
At a different income or in another province the saving is the reduction in taxable capital gain times your marginal rate; the marginal tax rate calculator shows yours.
The superficial loss rule
A capital loss is a superficial loss, and can't be deducted, if you or a person affiliated with you (such as your spouse or common-law partner, or a corporation either of you controls) buys, or has a right to buy, the same or identical property in the period from 30 calendar days before to 30 calendar days after the sale, and still owns it or has a right to buy it 30 calendar days after the sale. If you are the one who acquires the substituted property, you can usually add the denied loss to its adjusted cost base, so it reduces your gain or increases your loss when you sell it. The superficial loss guide covers who counts as affiliated (including your TFSA and RRSP), what happens to the loss when a registered plan does the buying, and how the rule compares with the US wash-sale rule.
Points that catch people during harvesting:
- Automatic purchases. A dividend reinvestment plan or a pre-authorized purchase of the same security in any of your accounts, or your spouse’s, inside the window.
- Purchases before the sale. The window starts before the sale, so buying more of a position and then selling the original lot at a loss can be caught too.
- Contributing the loser to a TFSA or RRSP. Contributing an investment in kind to a registered plan is a disposition at its fair market value at the time of the contribution: a gain must be reported, but a loss is nil and can't be claimed when the property goes to a trust governed by your TFSA, FHSA, RRIF, RDSP, deferred profit sharing plan or employees profit sharing plan, or by an RRSP of which you or your spouse or common-law partner is the annuitant (or becomes the annuitant within 60 days after the end of the year). Selling in the taxable account and contributing cash avoids this, as long as the plan doesn’t buy the same security back inside the window, which would make the loss superficial.
Using losses in other years
A loss that is more than your gains this year is not wasted:
- An allowable capital loss is applied first against your taxable capital gains of the same year.
- What is left (a net capital loss) can reduce taxable capital gains in any of the three years before, or in any future year.
- A net capital loss usually can only be applied against taxable capital gains, not other income.
- To carry a loss back or forward, complete Schedule 3 and attach it to your return, so the CRA's records show the loss.
- To apply a loss to an earlier year, use Form T1A, Request for Loss Carryback; don't file an amended return for that year.
- Net capital losses of earlier years are applied before those of later years.
- A loss carried to a year with a different inclusion rate is adjusted to that year's rate.
- Applying a net capital loss lowers taxable income but not net income, which is what many credits and benefits are based on.
When to harvest
- Toward year-end, once you know the year’s realized gains. A loss counts in the year of the sale, and brokers publish a last trading day for sales to count in the current tax year; check yours.
- After a market drop, when several holdings may be below cost at once.
- When rebalancing, where selling winners realizes gains that losers elsewhere can offset.
When it does little
- In registered accounts. Interest, dividends and capital gains earned in a TFSA are generally tax-free, even when you withdraw them. Income earned in an RRSP is usually exempt from tax as long as the funds remain in the plan, and you generally pay tax when you receive payments from it. A loss there has no tax use.
- With no gains to offset, now or in the carry-back years, the loss simply waits for future gains. That still has value if you expect gains later.
- When no acceptable substitute exists and you don’t want to be out of the market for the whole window.
- For small losses, where trading costs and the bookkeeping outweigh the tax.
Related guides
Sources
The figures and rules on this page come from these sources, last checked against them between September 23, 2026 and October 1, 2026. How we check facts.
- Canada Revenue Agency: Capital Gains – 2025
- Canada Revenue Agency: Before you contribute to a TFSA
- Canada Revenue Agency: Registered Retirement Savings Plan (RRSP)
- Canada Revenue Agency: What is a TFSA
- Justice Laws (Canada): Income Tax Act