If you hold an investment in a non-registered account and it's worth less than you paid for it, you can convert that paper loss into a real tax benefit. The mechanic is simple: sell the holding at a loss, claim the capital loss on your tax return, then buy something similar (but not identical) to keep your market exposure. It's called tax-loss harvesting, and it's one of the few moves that puts cash back in your pocket without changing what you own.
How the tax benefit works
In Canada
Capital losses can be applied against capital gains in the same year. Anything left over carries back up to 3 years or forward indefinitely — useful if you have no gains this year but big ones planned. Only 50%of net capital gains are taxable, but the loss reduces the taxable portion symmetrically. Losses can't reduce ordinary income (other than $3,000-style net loss provisions Canadians don't have).
In the United States
Capital losses first offset capital gains, then up to $3,000 per yearof ordinary income. The remainder carries forward indefinitely. Long-term losses ideally offset long-term gains; short-term losses offset short-term gains; if there's a mismatch, the IRS has a netting order.
The trap: wash sales (US) / superficial losses (Canada)
Both countries have a rule that prevents you from selling for the loss and immediately re-buying the same position. The IRS calls it the wash sale rule; the CRA calls it a superficial loss. Both have a 30-day window before and 30 days after the sale.
- If you (or your spouse, or a related entity) buy the same or “substantially identical” security in that 60-day window, the loss is disallowed.
- The loss isn't lost — it's added to the cost base of the new shares, deferring the benefit until you sell again.
“Substantially identical” is the loose part. Two ETFs from different providers tracking the same index are usually treated as substantially identical. Two ETFs tracking different indexes — even if both are broad-market US equity — are usually not. That gap is what makes harvesting practical.
How to actually do it
- Identify candidates. Look at non-registered (taxable) holdings trading below your adjusted cost base. Most brokerages now show unrealized gains/losses on each lot.
- Sell the loser. Realize the loss on the sale.
- Replace immediately with a similar-but-not-identical fund. Examples:
- Sold VOO (S&P 500). Buy IVV or SPLG instead — different provider, different index in name, but same exposure. Or buy a Total Market ETF like VTI to get broader exposure.
- Sold XEC (Cdn-listed emerging markets). Buy VEE — different provider tracking a different index.
- Wait 31 days. If you want to swap back to your original holding, wait out the window first.
What it's NOT good for
- Registered accounts (RRSP, TFSA, 401(k), IRA, Roth). Losses inside tax-sheltered accounts are not deductible. Don't bother.
- Holdings you'd sell anyway. If you were planning to dump it for portfolio reasons, that's just rebalancing, not harvesting.
- Tiny losses. Trading costs (bid-ask spread, commissions) plus the cost-base bookkeeping eat the benefit on small lots. Most advisors set a per-position threshold of $500–$1,000 minimum loss before harvesting.
Bonus: harvest gains too
Less famous, equally useful: if your taxable income is low enough this year, you can harvest gainsby selling appreciated holdings to bump your cost base higher with little or no tax. In the US, long-term capital gains are 0% up to a generous taxable-income threshold (~$47K single / ~$94K married for 2026 indexed); some early retirees do this every year. In Canada, the gain still triggers the 50% inclusion, but if you're in a low bracket, the marginal tax on it can be modest.
Bottom line
Tax-loss harvesting is one of the rare moves that's nearly always positive if done correctly: same market exposure, lower tax bill. The only ways to mess it up are violating the wash-sale window or harvesting in registered accounts where the loss doesn't count. If you have non-registered investments and any of them are underwater, take a look — the deadline is December 31 (Canada) or the calendar year for US filers.