Have you noticed some of your stocks getting pounded down at this time of year? No, we don’t mean most stocks, although it clearly has been a tough year, at least in the Canadian stock market. Nope, we mean certain companies, whose share prices are already down dramatically, seem to be accelerating declines to the downside right now. What’s happening?

Well, this is the time of year when investors look at their stocks' performance, and try to reduce capital gains taxes as much as they can. If investors actually have taken any capital gains in 2012, the first thing these lucky investors do is try to find some losses to offset them.

If you have capital losses offsetting capital gains, you can save up to 23% on your tax bill (based on the highest tax rates).

Because it hasn't been a very good stock year, there are lots of stocks out there (that you might own) that are down 50%, 60%, or even more. Taking losses is painful, but reducing your tax burden by selling them can help ease the pain a bit.

Here are a few examples of stocks that are way down in 2012:

East Asia Minerals (EAS) down 65% this year.

Niko Resources (NKO) down 81% this year.

Canaco Resources (CAN) down 76% this year.

Poseidon Concepts (PSN) down 73% this year.

So, every year, at this time, thousands of investors start looking to sell their losing stocks prior to the end of the tax year. This extra selling, sometimes, results in certain stocks seeing accelerated losses towards Christmas.

But a whole other group of investors looks at tax-loss selling candidates such as these four above as opportunities, rather than problems. These investors figure that, if others want to sell out before year end—at almost any price, just to get out—then that spells a potentially good trade for those going the other way.

Logically, it makes sense. When someone wants out of a stock for a non-fundamental reason (in this case, just for taxes), then they usually sell for a non-fundamental value as well. Nimble investors can buy stock on the way down, and, sometimes, make a nice profit and sell higher come January.

But the tax-loss-buying strategy is not for everyone, and is fraught with risks. What do you need to consider before trying this strategy out? Let’s look at a few points:

(1) Don’t buy for the long term; this is not the intention of flipping tax loss names.

(2) Get out fast if it doesn’t work. Sometimes, the selling continues long after tax-loss season. Don’t stick around if it does.

(3) Understand the risks—these are risky companies, that’s why they are down so much, remember?

(4) Don’t get greedy: Making 10% is pretty good on a ‘lousy’ company in a few weeks.

(5) It doesn’t always work. Sometimes, in certain years, tax-loss selling doesn’t occur much, or occurs well before you think it might and you miss it.

(6) Watch the sectors: This year, for example, most of the tax-loss selling candidates are in the junior mining space. Be careful not to overload your portfolio in this already-volatile space.

(7) Put in a “stink” bid. When buying, don’t chase these names. Put in a lousy bid, and the let the tax sellers come to you. If you miss the trade, it is no big deal.

There you have it. Some investors make a very good profit every year on this strategy. It’s not for everyone, of course, but can be another useful arrow in your arsenal of portfolio strategies.