Sequel to “Warning to Americans Investing In Certain Canadian Cannabis Stocks That Have A U.S. Presence”

Last month, I wrote about the major dividend tax withholding rate differences existing amongst the various types of stock holding entities, ranging from 0% for retirement accounts to 25% for non-retirement accounts. 

With many stocks more than 50% off from their 52-week highs, some investors could be sitting on significant losses and may find it convenient to “kill 2 birds with one stone”. That is, they may be considering selling their losing stocks in their personal account for tax loss reasons, then immediately replacing them in their retirement account in order to qualify for the exemption on withholding taxes.  This could be a BIG mistake costing investors’ money. 

Here’s why:

Normally, wash sale rules are triggered when a stock is disposed at a loss and then repurchased within 30 days of the original disposal of the shares of stock.  When a wash sale occurs within a personal account, the capital loss is denied until the repurchased shares are then sold without a subsequent repurchase for 31 or more days (not so with gains, which would be taxable regardless of wash sale rules).

However, that’s not the same situation when we sell for a loss in a personal account and then repurchase shares in a retirement account.  Under IRS Revenue Ruling 2008-5, the personal loss will not only be denied, but it will be permanently lost.  As mentioned in the ruling, “the loss on the sale of stock is disallowed under section 1091 of the Internal Revenue Code”.

What Should Investors Do?

If selling shares at a loss, wait out the prescribed time before repurchasing in an IRA in order to prevent the lost tax benefits.  However, in doing so, consideration must be taken about the economic opportunity lost by not participating in the Canadian Cannabis stock during the 30 or more days post the disposal of shares.

Speak with your tax advisor if you are still unsure of the best circumstances for you.