A Bizarro Tax-Loss-Selling Year

It is that time of year, when people think a little bit more about nice gifts for their loved ones and taxes. Tax-loss selling is common for those who own individual stock positions. Find names that have declined on the year relative to your cost base or are sitting with an unrealized capital loss, and sell them. Realize the loss to offset gains elsewhere or put it in the bank for future gains. The company sold can perhaps be repurchased after waiting the appropriate amount of time.

So why is this a bizarro year? Well, markets have really enjoyed a strong couple of years, which has made tax-loss-selling candidates few and far between. We conducted this analysis over the past seven years and looked at how many members of the TSX were down over 20% near year-end compared to their average price of the previous three years (names are included below). Down a lot from your three-year average, it would certainly make for a good tax-loss-selling candidate. Today there are only 19 names that are down over 20% (aqua bars in chart). And the decline is not as severe as in most other years (red triangle). That is the lowest showing since 2021. This year is really starting to look more and more like 2021.

That isn’t the only reason this year appears a bit bizarro. The average size or market capitalization of tax-loss candidates tends to be on the smaller size. Over the previous six years, the company size averaged about $3.4 billion. This year, it is a much larger sample with an average size of $6.7 billion. BCE and Nutrien are skewing the average much higher than normal. The sector breakdown is much different as well. Tax-loss-selling candidates tend to be most prevalent in the resource space, energy and materials. This year, fewer names from on the resource side and more from telecom, consumer discretionary, and real estate.

Tax-loss selling does create some added selling pressure on tax-loss-selling candidate names as the calendar year nears its end. Subsequently, assuming investors repurchase early in the new year, there will be some buying pressure in January. This contributes to the January effect, which is usually more prevalent for small-cap names (as they tend to get pushed around more by buying/selling pressure due to being less liquid).

However, this year may be a bizarro one. Given that markets have largely gone up over the past couple of years, tax-loss selling isn’t as big of a factor this year. In fact, there may be more folks waiting to sell in the new year to lock in some of those great gains over the past year. By doing so, the tax bill will be delayed until the 2025 taxation year (payable in 2026 for most). This year, it may be more about the delay in realizing tax gains vs tax-loss selling.

One thing we have learned over the years is that markets often move faster and sooner than one would normally expect. Maybe there are many people coming to the conclusion that January could see selling pressure as investors lock in some of the great gains over the past few years and finding ways to do it sooner – selling in tax-free accounts and using options/derivatives to effectuate the strategy without triggering capital gains. Hard to say, but we have started to see an odd development even for the mighty S&P 500. Breadth has been deteriorating rather quickly while the market makes new highs.

— Craig Basinger is the Chief Market Strategist at Purpose Investments

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Sources: Charts are sourced to Bloomberg L. P.

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