As the year comes to an end, investors begin preparing for one of the most strategic periods: Tax Loss Season.
Tax loss season refers to the period when individuals and institutions, sell underperforming stocks to realize capital losses. The losses can be used to offset capital gains realized earlier in the year, thereby reducing taxable income.
In Canada, the deadline for tax-loss selling is based on the settlement date, which now follows a trade date plus one business day.
Despite a strong overall performance in Canadian equities, several sectors and stocks have lagged, making them prime candidates for tax-loss selling.
1. Ballard Power Systems (TSX:BLDP)
At number one, Ballard Power Systems has had a less than favourable year. While its stock surged over 90 per cent at one point, it remains under pressure due to weak margins, restructuring costs, and analyst downgrades.
2. Retail Sector
Number two…Retailers like Hudson’s Bay Company and other apparel-focused chains have struggled amid high consumer debt, weak spending, and e-commerce competition. The sector has even seen its fair share of bankruptcies and closures, making it ripe for tax-loss harvesting.
3. Small-cap Resource Stocks
And coming in at number three, small-cap resource stocks. Valeura Energy dipped into oversold territory, with R-S-I levels below 30. These stocks are often volatile and thinly traded, making them prone to year-end selling pressure.
4. Tech stocks that missed the rally
Lastly, there are companies that missed the rally altogether. While the T-S-X tech sector broadly out-performed, some stocks like Lightspeed Commerce and Enghouse Systems remain well below their highs… Investors may be trimming positions in these to offset gains from high-flyers like Shopify or Constellation Software.
5. The contrarian play: Tax loss bounce
On the other side of things is ‘tax loss bounce’. Not all investors sell during tax loss season—some actually buy. Contrarian investors look for oversold stocks in late December, betting on a January rebound. This phenomenon, known as the tax loss bounce, is driven by the idea that selling pressure stops in the new year, allowing beaten-down stocks to recover.
Tax loss season is more than just a tax strategy—it’s a window into market psychology. Some investors cut losses; others position for rebounds. Whether gathering losses, or hunting for bargains…understanding the dynamics of this season can help you make smarter portfolio decisions.
This article is a journalistic opinion piece which has been written based on independent research. It is intended to inform investors and should not be taken as a recommendation or financial advice.