When you sell an investment for less than you bought it, you experience a capital loss. For example, if you buy shares for $10,000 and sell them for $4,000, you have a capital loss of $6,000. You can only use this loss to offset other capital gains. Zown examines this in more detail.

First, use your capital loss to offset gains in the same year. If your losses exceed gains, you can carry the leftover loss back to the previous three years or forward indefinitely to offset future gains.

However, things are a bit different this year because of changes in the inclusion rates. If you had a loss when the inclusion rate was 50% but want to use it against a gain when the rate is two-thirds, how does that work? Recent legislation clarifies this.

Adjusting Capital Losses

According to new rules, when you apply old capital losses to current gains, you must adjust the loss to match the inclusion rate of the gain. This means a loss incurred under one rate can still fully offset a gain under another rate.

For example, if you had a $6,000 capital loss in 1998 (when the rate was 75%), this was a net loss of $4,500. If you have a $6,000 gain in 2023 (rate 50%), this is a taxable gain of $3,000. You can deduct the adjusted $4,500 loss from 1998, resulting in a $3,000 deduction, fully offsetting the 2023 gain.

Dealing with the 2024 Inclusion Rate Change

For gains and losses before and after June 25, 2024, adjustments are needed. Here’s an example:

- If you had a $50,000 loss in 2023 (rate 50%) and apply it to a 2024 gain (rate two-thirds for gains above $250,000), the adjustment factor is 1.33. So, the $50,000 loss becomes $66,667 when applied to 2024 gains above $250,000.

Example Scenarios

Example 1:

• Ben has a $450,000 gain and a $50,000 loss in 2025, plus a $300,000 loss from 2017.

• Net gain for 2025: $400,000 ($450,000 - $50,000).

• First $250,000 at 50% rate = $125,000 taxable gain.

• Remaining $150,000 at two-thirds rate = $100,000 taxable gain.

• Total taxable gains for 2025: $225,000.

• Applying the 2017 loss: Net gain of $100,000 (taxed at 50%) = $50,000 taxable gain.

Example 2:

• Nabeel has a $600,000 gain on June 1, 2024, a $75,000 loss on July 25, 2024, and a $475,000 gain on Oct. 1, 2024.

• Period one gain (before June 25): $600,000 (50% taxable) = $300,000 taxable gain.

• Period two net gain (after June 25): $400,000 ($475,000 - $75,000).

• First $250,000 at 50% rate = $125,000 taxable gain.

• Remaining $150,000 at two-thirds rate = $100,000 taxable gain.

• Period two total: $225,000 taxable gain.

• Total 2024 taxable gain: $525,000 ($300,000 + $225,000).

Navigating the two inclusion rates can be tricky, but by adjusting past losses to match current inclusion rates, but you can effectively manage capital gains and losses. The key is to carefully apply these adjustments based on the new rules to minimize taxable gains.

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