Monday , 17 January 2022

Don’t Get Caught! December Tax-Loss Selling Could Drive Cannabis Stock Prices Down Much Further

Take action now! We could see an even greater decline in the cannabis sector than we have seen since to date as investors sell their losers (called tax-loss selling) so they can offset their gains from other investments.

This article by Lorimer Wilson, Managing Editor of munKNEE.com, is an edited ([ ]) and abridged (…) excerpt from an article by Alan Brochstein, CFA of  New Cannabis Ventures, for the sake of clarity and brevity to provide you with a fast and easy read. Please note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

Those “investors” who bought Canadian (LP) and/or American (MSO) “seed-to-sale” stocks this year have lost big-time so far in 2021 (see details here) with 78% of the constituents in the munKNEE Pure-Play “Seed-to-Sale” Pot Stocks Index, which represents 23 of the largest stocks in the cannabis sector, down 29.8%, on average, year-to-date and 100% of them are down from the sector’s peak on February 10th of this year. Investors in the U.S can carry over excess losses into the future, so selling some cannabis stocks at a loss can reduce one’s income tax to some degree (a maximum of $3,000 each year in capital losses is allowed).

Below is an article by Alan Brochstein, CFA of  New Cannabis Ventures entitled “Cannabis Investors Should Take Advantage of This Annual Opportunity” that explains the tax-selling opportunity better than anyone.

As the year’s end approaches, it’s a great time for investors to take action to reduce their near-term tax liability. For cannabis investors, this is especially important this year given the big run-up in the sector in the early part of the year followed by declining prices. Those who booked gains on the way up but haven’t booked losses could be looking at large tax bills in early 2022. Also, more diversified investors with gains from other parts of the market may be in this position. Fortunately, it’s not too late to take action.

To illustrate what many of our readers may be facing this year, let’s use an example. Suppose an investor bought 1,000 shares of Tilray on December 16th at $9.50 after the Tilray/Aphria merger was announced. This hypothetical investor didn’t get out at the very top, but let’s say she sold at $29.50 on February 8th, realizing a short-term capital gain of $20,000. If that is the only trade she did, then she will pay tax on the gain at her marginal tax-rate. Assuming 24%, this tax will be $4,800. In our example, though, she took most of her $29,500 proceeds and bought 800 shares of Green Thumb Industries that same day at $34, which she continues to hold with an unrealized loss, with the stock at $20.64, of approximately $10,700. By selling all of her GTI, she could cut her capital-gains taxes owed by more than 50%.This process of harvesting unrealized losses in order to reduce a near-term tax liability can be challenging for investors, as it is difficult to admit failure. Further, no one wants to sell out at what could be the bottom. For this reason, we wanted to share some ideas about how investors in the cannabis sector can take advantage of an abundance of opportunities to realize losses this year.

  1. In order to book a loss for tax purposes, an investor must not buy back the same security within 30 days, or it is considered a wash sale, unless the investor has elected to use mark to market accounting
  2. One can, however, buy back a similar security, and this is what we encourage our readers to consider. In our example above of the investor now holding GTI, she has a number of options.
    • GTI has four other peers in the same market cap range, and she can simply replace it with one of those.
    • Another idea is that GTI represents 10.8% of the AdvisorShares Pure US Cannabis ETF (MSOS), and she can sell GTI and buy MSOS and probably get relatively similar performance. For a sense of how closely these all track one another, here is the performance since the end of Q1:

This same concept can be applied to other parts of the market. For example, selling one Canadian LP to buy another LP or an ETF with LPs or selling an ancillary stock like GrowGeneration to buy one like Hydrofarm (or vice versa) can be a way to stay invested while reaping the valuable tax-loss. Many readers who are focused solely on the cannabis sector may not have any gains but just losses given the decline in the market this year. Investors in the U.S can deduct up to $3,000 each year in capital losses and can carryover excess losses into the future, so selling some cannabis stocks at a loss can reduce one’s income tax to some degree, even if there aren’t gains to offset. The same idea discussed above applies, as one doesn’t have to exit the market. Instead, one has to stay out of the stock sold for 30 days and can then buy it back.

For our American readers, the last date to book losses is 12/31, while our Canadian readers will need to do so by the 29th.

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