-Welcome back to Portfolio Rescue. Duncan, it feels like a strange day to talk about the markets with everything going on in Ukraine. We actually had a viewer, one of our podcast listeners, emailed us this week and was asking about the markets and some of the stuff we were saying.

And he said he was from Ukraine. And I wrote him back saying, thanks for asking about the markets, but what's going on in the general mood of the people there? I can't even begin to imagine what it's like there right now. I guess this is a good reminder to count yourself lucky if your biggest worry right now is your portfolio.

These are temporary problems. I guess it's also a good reminder that so much of what goes on in the markets and in the economy just is completely outside of your control. So as an investor, you have no control over geopolitics and the actions of politicians. You have no control over monetary policy or fiscal policy.

You have no control over what happens in the economy. You have no control over the level or direction of interest rates, the stock market, inflation, all this stuff. It's all completely out of your control. There's just nothing you can do about it. So the only thing that really matters at a time like this is focusing on what you can control.

So if you think about your finances, your savings rate, and your asset allocation, and the fees you pay, and your investment plan, and your long-term goals, and maybe the most important thing right now is how you react to violent moves in the market. It's not necessarily the actions of the markets that matter.

It's like for your ultimate success or failure as an investor, it's like your reactions. How you handle yourselves when markets are moving violently in the world is seemingly going mad. So this is kind of a good time to slow down, not make any rash decisions. It's obviously scary and uncertain.

People cope in different ways when this stuff happens. There are people who tell you they know exactly what's going to happen next. My default for something like this is just not trying to be a hero. Don't make it worse by trying to make a huge mistake at the wrong time.

So we're still going to talk about finance stuff today, because maybe that's how I personally cope with this stuff. Markets aren't the most important thing right now, but it doesn't mean we can't ignore them. So I don't know if you stick around to the end of the show. Duncan, we're going to give some stuff away to people, free stuff.

What do we got? Yeah, yeah. I don't think anyone's feeling as celebratory as we were on Tuesday for What Are Your Thoughts. But yeah, we said we were going to do a giveaway today. So we're still going to give away a shirt, a coffee mug, and a sticker. So yeah, make sure you hang out till the end.

And we're going to do the same thing we did for What Are Your Thoughts, where we'll use the hashtag 100, lowercase k, hashtag 100k. And yeah, we'll do a drawing. So stick around for that. And yeah, I think what you just said is great, Ben. But yeah, obviously, more important stuff going on.

But I think for a lot of people, this kind of thing is giving a sense of normalcy, hopefully a calm voice of reason, and kind of all this craziness. So yeah, that's why we're here today. So hopefully everyone gets something out of it. All right, let's do a question.

OK. So question one is, the SMPU returned 18% in 2020 after a chaotic year. In 2021, volatility came way down, and the SMPU returned 28%. What psychological effect does this have on investors, considering how much has gone on over the past couple of years, and the US markets continue to outperform?

Has the sell-off been totally valuation-based, or do you think there's a behavioral dynamic at play as well? Obviously, there's a million things going on right now. The reason that the market is selling off today, of course, is Russia is going to war with Ukraine. That's an easy one. But the stock market has been selling off for a number of weeks now.

So you have inflation at its all-time high in the last four decades. The Fed is tightening monetary policy. Growth stocks have been crashing for a while now, for a little over a year now. We're arguably in the craziest housing market we've ever been in. Interest rates are finally starting to rise.

We've had all these labor market and supply chain issues. And then we've been in a pandemic for two years. So the reasons are obviously noticeable. And yes, all that stuff matters, but economic data and geopolitics don't always impact the market. Sometimes the market simply ignores this stuff, and sometimes it's paying attention.

So why is it paying attention more now? The simplest reason is price, because things have gone really well. So Duncan put up this first chart here of the returns over the last three years. So this is the S&P and the NASDAQ in 2019, 2020, and 2021. We've had phenomenal returns.

The S&P is up 100% from 2019 to 2021. The NASDAQ was up 160% in that time. So we've had these huge-- so zoom out a little bit. It's easy to know why stuff got destroyed. Going back even further, the NASDAQ from-- I looked at this yesterday-- 2009 to 2021 was up 1,400% more than that, 23% per year.

And it's like, there's no way this stuff can keep growing forever. So why are my growth stocks getting crushed? Because growth stocks did so well for so long. And the stock market, why is it falling this year? Probably because it went up so long. Think about the 1987 crash.

I've read all the books, what happened and why. Why did we have the worst one-day crash in history? Well, portfolio insurance and people were selling, and interest rates were rising. Duncan, any guesses on the 10-year Treasury yield in 1987 crash going into it? No, absolutely no. It was almost 10%.

Rates were rising 10%. Put up the chart that shows what happened. I think what a lot of people forget-- so this is the 1987. That's unimaginable now. It is, right? But this is-- so from 1982 to 1986, stocks were up 200%, 300%. And then, in the first eight months of the year, the stock market was up 40% in 1987.

And then we had the biggest one-day crash in history. And there's all these market dynamic things and structures that went on. But the biggest reason sometimes that stocks go down is because they went up. And it's all psychological. Like, if you're thinking about valuations and fundamentals right now, it doesn't matter at all.

And it's like, it shows how price changes. Like, view how people-- so in bear markets, people-- prices are falling, and people think everything's just going to get worse, and you feel like an idiot. And then things do get a lot worse. But then they get a little less worse than they did before.

And things start rising. And then stocks go up, and then you have a bull market. And then everyone feels like a genius. And then you realize trees don't grow to the sky, and things get better. But they get better at a slower rate. And then stocks log in, and prices roll over, and you have a correction.

And this is kind of the way this works. It's like rinse and repeat. It doesn't happen all on a set schedule, because you could have said for the last eight years, tech stocks are up too high. They're moving. It doesn't make sense. So you don't know when this is going to end.

But that's kind of the way to think about it, is that sometimes when prices are higher, the risks for the lower returns are there, because things have been going so well. Now, I don't know when this correction will end. No one really does. The one thing I can say with reasonable certainty is that we're going to see some violent moves in the coming weeks, I would say.

So volatility tends to cluster when markets are going down, because people panic. And also, people want to pretend like they have both hands on the steering wheel, and feel like they're doing something. So that's why the best days in the market actually happened during downturns. So we're going to see some violent rallies in the coming weeks, I think, as this thing-- who knows how far it goes.

But that's the only thing I can say with certainty, is that we're going to see some huge moves in both directions coming. New boil question of the day. I don't remember. When does something move out of being a correction into something more? Is there a certain threshold? If we're using the actual definitions, a correction is down 10%, but less than 20%.

And if we look right now, the S&P 500 is in a correction. I just looked before we started. It's down 13%. The Russell 2000 index of small cap stocks is down 21%. The NASDAQ 100 is down 20%. Those are bear markets. Now, people make these determinations up, but 20% is a bear market.

10% is a correction. OK, gotcha. And yeah, it brings back to memory all those questions we were getting about triple-weathered ETFs a while back. Those things, if people are really big into those, those are really getting hit. Yeah, and sometimes it doesn't even matter the reason. People focus on the reason at the time because it helps them think that they can guess what's going to happen next.

But sometimes the reason doesn't matter, and this just happens, unfortunately. This is part and parcel with risk assets. Right. Let's do another one. OK. So up next, we have-- this is a question from North Carolina. I believe Jacob-- let me double-check that. Yeah, this is a question from Jacob in North Carolina.

Do you all have any advice or recommendations for how to handle taxes on crypto as tax season approaches? I had my first foray into DeFi last year and have quickly realized that the large number of transactions makes calculating my realized gains completely untenable without some sort of software automating it.

This is a good one. So we get emails on a wide range of topics-- markets, and the economy, and personal finance, and retirement accounts, and all this stuff, and different types of investments. By far, the biggest-- and we just had someone go through our inbox and totally clean it out and put these different questions into different categories.

And by far, the biggest category is taxes. This is why we have our man, Bill Sweeton, all the time. So let's bring Bill on. He's our tax expert. Hey, Bill. Yeah, good to be back with you again. Who would know? Tax question's really popular in late February. Yes, I think it's a lot of that because we're getting closer to that.

But I mean, I guess people just hate paying taxes almost more than they enjoy making money. So that's why people-- it's such at the forefront. People just hate paying taxes. And you know this. How dare you steal my take? How dare you? But the only thing I really know about taxes and crypto is there's no wash sale rule.

So if you wanted to sell now that crypto is lower, you could sell your Bitcoin, or Ethereum, or whatever, and buy it back immediately, and just lock that gain in for tax purposes. That's the extent of my knowledge for taxes for crypto. What else is there to know? Correct, yeah.

Fails the Howley test. It's not a security. So let's talk basics, though, Ben, because this is a great question. And crypto's a really volatile, really wild asset class, really a lot of fun in the wild, wild west there right now. Basics, what did you pay for the token when you bought it?

What's your cost basis? When did you sell it? What's the exit on sale? And that gets complicated. I'm going to talk about that in a second. And then the dates on when the purchase happened and the sale happens, that's very important because that determines short-term or long-term capital gains.

So pretty simple and a real easy example. I buy Bitcoin for $6,000, one Bitcoin, in February 2020. I sell it this morning in February 2022 for $36,000. I got a $30,000 gain. Congrats, right? Guess what? You owe 15% long-term capital gains tax on that asset. So you need to cough up about $4,500 of federal tax.

But what makes this really complex is when have you actually sold the token? And this is what a lot of folks that are kind of noobs in crypto land don't get. If you sell it for cash, that's the obvious example. What happens if you trade one currency for another?

You flip your Bitcoin for Ethereum. Guess what? That's a taxable transaction. Let's say you use your Ethereum to buy something. Let's say it's some asset, pizza. It's a classic example from back in the day. That's a taxable event. If you get airdrop tokens from a hard fork, if you do any staking or mining, that's taxable income.

Or if you get paid in cryptocurrency to do a job, to do a gig, that is taxable income. So all this stuff matters. Let me cut to the chase. There's a really great platform that I use called Taxbit. This is not an endorsement, but I am familiar with the platform.

And it's great, because if you're able to link all of your custodian's wallets in one place, it'll give you some really awesome tax reports, including Form 8949, which you're going to need for your 2021 income tax return. What if you are taking your Ethereum and buying NFTs? Yeah, that's it.

So again, you're flipping one token for another. Is the IRS really on top of this, though? Like, do they know what's going on? Like, if you're in there flipping, if you're staking in DeFi land and you're using your Ether to buy NFTs, do they have any idea what that is?

Or are people skirting tax laws at this point in there? Are people skirting tax laws? Like, if I pay my contractor in cash, he's reporting that all the time as income, right? What makes cryptocurrency really interesting, Ben, is that it's there on a chain, right? And so this is public to the extent that you can look at an address and you can see a transaction, right?

So is the IRS-- are there agents in the IRS that have time to take a look at your Coinbase wallet and determine that you made a taxable transaction? I mean, God's honest truth is probably not. They're still processing somewhere in the neighborhood of 8 or 10 million tax returns from 2020.

If you send them an 83(b) election or a form, I get those back about seven months later. So that gives you an indication of how far behind the IRS is. But they're catching up, and they're catching up every day. And we're going to talk about this a little bit later.

But there's a pretty big bomb coming January 1, 2023, when all this stuff is going to start getting reported to the IRS. And you can run, but you can't hide. What level do you think Coinbase would need to get to stock market-wise before all of their best talent jump ship to the IRS?

Yeah, unfortunately, the pay scale is a little different there. They don't tend to compensate you. I don't think the IRS is going to be paying anyone in Bitcoin, either. No, it's government service, too. But yeah, and again, we should charge them for this spot. But check out taxbit.com. That's the best platform that I've found for my personal use.

It's not an endorsement. So do your due diligence on that. Let's do the next one, Duncan. Cool. OK. So up next, we have a question from Bill. Not this Bill. What is a good tax-efficient strategy for withdrawing from a 401(k), Roth IRA, and traditional IRA while receiving a pension until eligible for full Social Security benefits at 67?

Not expecting to need large withdrawals to live on. This is another topic that's come up quite a bit is taking the assets down. Blair and I talked about this on the last show a little bit. And so people trying to figure out, yes, I've accumulated all these assets, but now what?

How do I take them out? Are there good rules of thumb for this kind of thing? Different accounts you want to take out earlier or later, spread them out a little bit, a little each? What do you think? Yeah, we covered this about three weeks ago. It's a similar question.

Let me just start quickly, though. Let me push back on the premise. Each year that you defer on your Social Security benefit from age 62 all the way out to age 70, you get an extra 8% a year. There is nothing magical about full retirement age outside of some other filing requirements.

If you file at 68, you get an 8% lifetime boost for your income. So you do need to judge that, though, on life expectancy. But if you expect to live till 83 or longer, and you look at family history, it probably makes sense to wait till 70. But that said, I think it's important to think about, how does this taxation work?

And if you're able to live on a lower pension, that means your taxable income is probably low. Duncan, John, can you pull up my chart? JG, let's do this thing. Tax brackets matter. And we talked about this, though, the last time that we had this call. There's a really big tax jump that happens around the 22% tax bracket.

This is a merrily fine joint couple. The pointed arrow is pointing to where you go from 12% to 22%. That, to me, is a really magical place to think about in the tax code, assuming that your pension is below that amount. Because you can take assets that are in traditional IRA that you have to start taking distributions from at age 72.

And front load those in the present. And so if your income falls below a certain threshold, I would always look at that. The very first Portfolio Rescue episode I was on, Ben, do you remember what the tattoo on my back reads? Roth IRA, right? Roth IRA conversion. You're damn right.

And so that's the thing to think about. Once you convert that asset to Roth, you no longer have to pay tax on it again. And so if you expect your income to be higher in the future after you file for Social Security benefits, it makes sense to front load some distributions or contributions in the present.

But unfortunately, like everything in tax, it all depends. All right. OK. Let's do one more, Duncan. OK. So up next, question four we have is from James, who writes-- this is a fun one. I hold season tickets for an NBA team. They don't tell us which one, but I usually sell a portion of the tickets to recoup some of the costs.

I don't make a profit for the season as a whole, but for individual games, I will sometimes turn a profit. Starting this year, Ticketmaster, where I'm forced to resell, has informed me that they are filing a 1099K for anyone who receives over $600 in a calendar year, which will include me.

Will I need to add ticket income to my tax filing? And if so, can I deduct the cost of season tickets against this new income? This is a strange one. Michael has season tickets to the Knicks. I was wondering, shouldn't you get a write-off if your team doesn't make the playoffs or they finish under 500?

If you buy season tickets to the Detroit Lions, the government should be paying you as a citizen for helping the economy. Shouldn't you make the owner pay you? Something like that. So before we get into this specific one, Bill, I asked you yesterday, what are some of the strangest things you've seen on a tax filing?

Because this one would-- I think this one would count, right? NBA tickets? What have you seen? Yeah, twice. And I talked about this with Bill Arts. Shout out to Bill A, RCPA in Philly. I talked about it with him. The funniest thing I've ever seen twice was mascot expenses.

And so when you're filing somebody's tax return, you kind of need to ask them questions when you see something funky like that come across. So one answer was, it's our company mascot. And I said, can you elaborate on what the mascot is? They were like, well, it's a doodle, and she cheers everybody up.

And so I was like, is that the dog that lives in your house? And are these actually dog grooming expenses? He was like, yeah, you got me. Those, not deductible. That's a personal expense, sorry. The more interesting one happened. Client-- home office, actually, but had a lobby, right? And so clients would come in.

I think it was a hairdresser or something like that. People would come in. They'd sit in a lobby. And they'd wait. And the mascot expense was for a fish tank. And the idea was, well, people sitting in there waiting for somebody to see something nice to look at. I actually allowed that expense.

I thought that was reasonable, ordinary, necessary. I would say mascot expenses. The other really funky one that I've come across, though, is anything involving plastic surgery or other-- like teeth whitening, other personal expenses. And those typically are a no-no. But those are the two weird categories that I see.

So what if this YouTube channel sticks around for another 30 years, and I get a facelift at age 60? Is that kind of the write-off? I've got to say, pretty. I have a face for radio, so you're definitely speaking my language. But unfortunately, no. The IRS is going to determine that to be a personal expense.

It's a personal appearance. Same thing for clothing. That's basically anything that's not a costume. If you can adapt it for civilian use-- if I can wear this shirt to the club, and I do every Friday night-- that's not deductible to me, unfortunately. I've got to imagine this person, even though they're making income, they cannot deduct the cost of those tickets.

I have to imagine that's a pretty simple one, even. Yeah, it depends. So that's, again, the freaking tax thing that sucks. So just wait till this happens in crypto land, by the way. That's what I was getting at before-- January 1, 2023. Brace yourselves, because 1099s are coming from Coinbase.

But leaving that aside, the quick and dirty answer is yes. You can deduct the cost of tickets, and you should deduct that against your cost of sales. However, the way the taxpayer framed this question, this smells a lot like a hobby to me. This is not a bona fide business in the eyes of the Internal Revenue Code.

And what that means is you can and should deduct the cost of your tickets, but only to the extent of your income. If you go beyond that, you might be able to get away with it for a year or two. But in order for a business to be bona fide, in order for you to be able to deduct expenses beyond your income, you need to be able to prove that you're in it for a profit.

So to turn it into a business, he has got to be one of those guys that stands outside the stadium going, tickets, tickets. Bingo. Yeah, and I've never bought a ticket from one of those dudes. Have you? Because-- No way. I would not trust that. Yeah, that kind of scares me.

Yeah, definitely. So but regardless, I mean, if you're just sort of recouping tickets to cover your cost, that's probably really bad business in the eyes of the IRS. So the natural question, again, is this going to be a hobby? Are you actually trying to generate a profit? I would probably Boy Scout honor, like if you want to play this straight, report it as a Schedule C entity on your tax return.

Report the total income on 1099(k). Match that with an expense that has no impact on your tax return. Move on down the road. And you should also always drive below the speed limit. Cook your burgers to 500 degrees Fahrenheit and drink 40 gallons of water a day. But this kind of thing, we'll see.

I don't know how serious the IRS is going to take it. So I think as taxpayers, we got to play by the rules, guys. Come on. My season tickets are buying a nice big TV that looks good in HD. Yeah, and curiously, that's the ticket. You have a better view in most cases.

Yeah. Yeah. All right, Bill, you served your country. You've been involved in military conflict before. I'm just curious, what are your thoughts and feelings on the day like today? Yeah, not to be a downer, but I'm horrified. We have not seen large-scale war of this magnitude since 1945 in Europe.

I have a very good friend who's the best man at my wedding who is deploying to Eastern Europe today. So I would just say, everybody out there, it sounds so trite, but this is a moment that should connect humanity. And ultimately, I pray for the free people of Ukraine.

And I hope this all ends very quickly and satisfactory, because this is very serious business. So thank you. Please pray for my friend. His name is Todd. Right, well said. All right. Thanks, everyone, for watching. Duncan, are we going to do the giveaway now? Yeah, yeah. So like I said, if you've been putting #100k, lowercase k, into the chat, we're going to pull from that here in a second with this cool little feature that StreamYard has.

Wow, look at the odds here. Only 40 people entered today. Wow, we had like 300 and some the other day. So yeah, that's a pretty good odds. Roll those dice. So yeah, let's go for it. Let's hit it now. Did you rig this, Duncan? I wish I was good enough coding to be able to rig this.

The question is, is this taxable income to Bits of Interest? OK, long time, long time viewer. I definitely recognize their profile pic from the chat. Your 1099k is in the mail. Congrats. So yeah, so send us-- yeah, this is a taxable event, obviously. No, I'm just kidding. But so send us an email at askthecompoundshow@gmail.com with your address and your shirt size.

And we'll get the shirt sticker and mug. Ben doesn't drink coffee mug in the mail to you. So yeah, congratulations. This is something I think we'll do more moving into the future. But today was to celebrate the fact that we're almost at 100k. And hopefully by the end of the week, we'll be at 100k, because that's what I said on what are your thoughts.

All right, we're getting there. All right, if you have a question for us, especially correction-related. I'm sure a lot of people have a lot of questions right now. The market's falling. We're in a crisis. Send us a question. Askthecompoundshow@gmail.com. Thanks again to Bill for always being our taxman. Thanks to Duncan.

And we'll see you next week. See you, everyone. (upbeat music)