What Causes Market Sell-Offs?

00:00:00.000 | [MUSIC PLAYING]

00:00:17.560 | -Welcome back to Portfolio Rescue.

00:00:21.240 | Duncan, it feels like a strange day to talk about the

00:00:22.760 | markets with everything going on in Ukraine.

00:00:24.480 | We actually had a viewer, one of our podcast listeners,

00:00:27.320 | emailed us this week and was asking about the

00:00:29.880 | markets and some of the stuff we were saying.

00:00:32.200 | And he said he was from Ukraine.

00:00:33.880 | And I wrote him back saying, thanks for asking about the

00:00:38.400 | markets, but what's going on in the general mood of the

00:00:40.680 | people there?

00:00:41.040 | I can't even begin to imagine what it's

00:00:43.480 | like there right now.

00:00:44.560 | I guess this is a good reminder to count yourself

00:00:46.760 | lucky if your biggest worry right now is your portfolio.

00:00:50.860 | These are temporary problems.

00:00:52.840 | I guess it's also a good reminder that so much of what

00:00:55.640 | goes on in the markets and in the economy just is completely

00:01:00.440 | outside of your control.

00:01:01.840 | So as an investor, you have no control over geopolitics and

00:01:06.800 | the actions of politicians.

00:01:07.960 | You have no control over monetary

00:01:10.200 | policy or fiscal policy.

00:01:11.480 | You have no control over what happens in the economy.

00:01:13.560 | You have no control over the level or direction of interest

00:01:16.400 | rates, the stock market, inflation, all this stuff.

00:01:19.680 | It's all completely out of your control.

00:01:20.720 | There's just nothing you can do about it.

00:01:22.680 | So the only thing that really matters at a time like this is

00:01:24.680 | focusing on what you can control.

00:01:27.240 | So if you think about your finances, your savings rate,

00:01:30.480 | and your asset allocation, and the fees you pay, and your

00:01:33.200 | investment plan, and your long-term goals, and maybe the

00:01:35.800 | most important thing right now is how you react to violent

00:01:38.120 | moves in the market.

00:01:39.480 | It's not necessarily the actions of the

00:01:41.080 | markets that matter.

00:01:42.160 | It's like for your ultimate success or failure as an

00:01:45.640 | investor, it's like your reactions.

00:01:47.640 | How you handle yourselves when markets are moving violently

00:01:50.200 | in the world is seemingly going mad.

00:01:53.080 | So this is kind of a good time to slow down, not make any

00:01:55.560 | rash decisions.

00:01:56.600 | It's obviously scary and uncertain.

00:01:58.680 | People cope in different ways when this stuff happens.

00:02:01.680 | There are people who tell you they know exactly what's going

00:02:03.600 | to happen next.

00:02:04.680 | My default for something like this is just not

00:02:06.680 | trying to be a hero.

00:02:07.480 | Don't make it worse by trying to make a huge mistake at the

00:02:09.880 | wrong time.

00:02:11.480 | So we're still going to talk about finance stuff today,

00:02:13.800 | because maybe that's how I personally cope with this

00:02:15.400 | stuff.

00:02:16.880 | Markets aren't the most important thing right now, but

00:02:19.040 | it doesn't mean we can't ignore them.

00:02:20.440 | So I don't know if you stick around to the end of the show.

00:02:22.720 | Duncan, we're going to give some stuff away to people,

00:02:24.280 | free stuff.

00:02:24.760 | What do we got?

00:02:25.480 | Yeah, yeah.

00:02:27.680 | I don't think anyone's feeling as celebratory as we were on

00:02:30.680 | Tuesday for What Are Your Thoughts.

00:02:31.680 | But yeah, we said we were going to do a giveaway today.

00:02:33.600 | So we're still going to give away a shirt, a coffee mug,

00:02:36.920 | and a sticker.

00:02:38.360 | So yeah, make sure you hang out till the end.

00:02:40.480 | And we're going to do the same thing we did for What Are Your

00:02:43.680 | Thoughts, where we'll use the hashtag 100, lowercase k,

00:02:47.280 | hashtag 100k.

00:02:48.840 | And yeah, we'll do a drawing.

00:02:49.960 | So stick around for that.

00:02:51.240 | And yeah, I think what you just said is great, Ben.

00:02:53.520 | But yeah, obviously, more important stuff going on.

00:02:55.840 | But I think for a lot of people, this kind of thing is

00:02:59.080 | giving a sense of normalcy, hopefully a calm voice of

00:03:03.520 | reason, and kind of all this craziness.

00:03:05.680 | So yeah, that's why we're here today.

00:03:07.400 | So hopefully everyone gets something out of it.

00:03:09.720 | All right, let's do a question.

00:03:10.920 | OK.

00:03:12.720 | So question one is, the SMPU returned 18% in 2020 after a

00:03:18.280 | chaotic year.

00:03:19.480 | In 2021, volatility came way down, and the SMPU returned 28%.

00:03:23.760 | What psychological effect does this have on investors,

00:03:26.160 | considering how much has gone on over the past couple of

00:03:28.720 | years, and the US markets continue to outperform?

00:03:31.400 | Has the sell-off been totally valuation-based, or do you

00:03:34.080 | think there's a behavioral dynamic at play as well?

00:03:37.800 | Obviously, there's a million things going on right now.

00:03:39.560 | The reason that the market is selling off today, of course,

00:03:41.480 | is Russia is going to war with Ukraine.

00:03:42.820 | That's an easy one.

00:03:43.600 | But the stock market has been selling off for a number of

00:03:46.520 | weeks now.

00:03:46.960 | So you have inflation at its all-time high in the last four

00:03:49.880 | decades.

00:03:50.320 | The Fed is tightening monetary policy.

00:03:51.720 | Growth stocks have been crashing for a while now, for

00:03:54.320 | a little over a year now.

00:03:55.320 | We're arguably in the craziest housing market we've ever been

00:03:58.080 | in.

00:03:58.720 | Interest rates are finally starting to rise.

00:04:00.560 | We've had all these labor market and supply chain

00:04:02.480 | issues.

00:04:03.480 | And then we've been in a pandemic for two years.

00:04:05.280 | So the reasons are obviously noticeable.

00:04:08.560 | And yes, all that stuff matters, but economic data and

00:04:12.280 | geopolitics don't always impact the market.

00:04:14.520 | Sometimes the market simply ignores this stuff, and

00:04:16.640 | sometimes it's paying attention.

00:04:17.600 | So why is it paying attention more now?

00:04:20.600 | The simplest reason is price, because things have gone

00:04:24.840 | really well.

00:04:25.440 | So Duncan put up this first chart here of the returns over

00:04:28.040 | the last three years.

00:04:28.600 | So this is the S&P and the NASDAQ in 2019,

00:04:32.040 | 2020, and 2021.

00:04:33.680 | We've had phenomenal returns.

00:04:35.880 | The S&P is up 100% from 2019 to 2021.

00:04:39.360 | The NASDAQ was up 160% in that time.

00:04:43.120 | So we've had these huge--

00:04:44.280 | so zoom out a little bit.

00:04:45.560 | It's easy to know why stuff got destroyed.

00:04:47.600 | Going back even further, the NASDAQ from--

00:04:49.640 | I looked at this yesterday--

00:04:50.720 | 2009 to 2021 was up 1,400% more than that, 23% per year.

00:04:57.760 | And it's like, there's no way this stuff can

00:04:58.960 | keep growing forever.

00:04:59.680 | So why are my growth stocks getting crushed?

00:05:01.320 | Because growth stocks did so well for so long.

00:05:03.000 | And the stock market, why is it falling this year?

00:05:04.920 | Probably because it went up so long.

00:05:06.280 | Think about the 1987 crash.

00:05:07.800 | I've read all the books, what happened and why.

00:05:10.320 | Why did we have the worst one-day crash in history?

00:05:12.560 | Well, portfolio insurance and people were selling,

00:05:15.440 | and interest rates were rising.

00:05:17.480 | Duncan, any guesses on the 10-year Treasury

00:05:19.360 | yield in 1987 crash going into it?

00:05:22.520 | No, absolutely no.

00:05:24.160 | It was almost 10%.

00:05:25.760 | Rates were rising 10%.

00:05:27.080 | Put up the chart that shows what happened.

00:05:29.000 | I think what a lot of people forget-- so this is the 1987.

00:05:31.440 | That's unimaginable now.

00:05:32.680 | It is, right?

00:05:33.720 | But this is-- so from 1982 to 1986,

00:05:37.600 | stocks were up 200%, 300%.

00:05:40.240 | And then, in the first eight months of the year,

00:05:43.120 | the stock market was up 40% in 1987.

00:05:45.080 | And then we had the biggest one-day crash in history.

00:05:47.160 | And there's all these market dynamic things and structures

00:05:49.280 | that went on.

00:05:49.720 | But the biggest reason sometimes that stocks go down

00:05:51.920 | is because they went up.

00:05:53.040 | And it's all psychological.

00:05:54.240 | Like, if you're thinking about valuations and fundamentals

00:05:56.700 | right now, it doesn't matter at all.

00:05:58.440 | And it's like, it shows how price changes.

00:06:00.320 | Like, view how people-- so in bear markets,

00:06:02.680 | people-- prices are falling, and people

00:06:04.400 | think everything's just going to get worse,

00:06:05.760 | and you feel like an idiot.

00:06:06.880 | And then things do get a lot worse.

00:06:08.720 | But then they get a little less worse than they did before.

00:06:10.880 | And things start rising.

00:06:12.240 | And then stocks go up, and then you have a bull market.

00:06:14.600 | And then everyone feels like a genius.

00:06:16.360 | And then you realize trees don't grow to the sky,

00:06:18.360 | and things get better.

00:06:19.280 | But they get better at a slower rate.

00:06:21.240 | And then stocks log in, and prices roll over,

00:06:23.560 | and you have a correction.

00:06:24.740 | And this is kind of the way this works.

00:06:26.360 | It's like rinse and repeat.

00:06:27.480 | It doesn't happen all on a set schedule,

00:06:31.200 | because you could have said for the last eight years,

00:06:33.400 | tech stocks are up too high.

00:06:35.000 | They're moving.

00:06:35.640 | It doesn't make sense.

00:06:37.160 | So you don't know when this is going to end.

00:06:38.400 | But that's kind of the way to think about it,

00:06:40.400 | is that sometimes when prices are higher,

00:06:42.720 | the risks for the lower returns are there,

00:06:44.540 | because things have been going so well.

00:06:46.760 | Now, I don't know when this correction will end.

00:06:49.080 | No one really does.

00:06:49.960 | The one thing I can say with reasonable certainty

00:06:51.420 | is that we're going to see some violent moves in the coming

00:06:54.040 | weeks, I would say.

00:06:55.640 | So volatility tends to cluster when markets are going down,

00:06:58.640 | because people panic.

00:06:59.480 | And also, people want to pretend like they

00:07:01.240 | have both hands on the steering wheel,

00:07:03.040 | and feel like they're doing something.

00:07:04.680 | So that's why the best days in the market

00:07:06.680 | actually happened during downturns.

00:07:08.720 | So we're going to see some violent rallies in the coming

00:07:11.480 | weeks, I think, as this thing--

00:07:13.640 | who knows how far it goes.

00:07:14.720 | But that's the only thing I can say with certainty,

00:07:16.160 | is that we're going to see some huge moves in both directions

00:07:18.040 | coming.

00:07:19.040 | New boil question of the day.

00:07:20.880 | I don't remember.

00:07:22.000 | When does something move out of being a correction

00:07:24.560 | into something more?

00:07:26.400 | Is there a certain threshold?

00:07:28.560 | If we're using the actual definitions,

00:07:30.760 | a correction is down 10%, but less than 20%.

00:07:34.200 | And if we look right now, the S&P 500 is in a correction.

00:07:36.600 | I just looked before we started.

00:07:37.960 | It's down 13%.

00:07:38.600 | The Russell 2000 index of small cap stocks is down 21%.

00:07:42.160 | The NASDAQ 100 is down 20%.

00:07:44.160 | Those are bear markets.

00:07:45.720 | Now, people make these determinations up,

00:07:48.800 | but 20% is a bear market.

00:07:50.960 | 10% is a correction.

00:07:52.360 | OK, gotcha.

00:07:53.320 | And yeah, it brings back to memory all those questions

00:07:56.960 | we were getting about triple-weathered ETFs

00:08:00.240 | a while back.

00:08:00.760 | Those things, if people are really big into those,

00:08:03.440 | those are really getting hit.

00:08:04.880 | Yeah, and sometimes it doesn't even matter the reason.

00:08:07.960 | People focus on the reason at the time

00:08:09.880 | because it helps them think that they can

00:08:11.240 | guess what's going to happen next.

00:08:12.600 | But sometimes the reason doesn't matter,

00:08:14.280 | and this just happens, unfortunately.

00:08:16.080 | This is part and parcel with risk assets.

00:08:19.160 | Right.

00:08:19.660 | Let's do another one.

00:08:20.840 | OK.

00:08:23.520 | So up next, we have--

00:08:26.320 | this is a question from North Carolina.

00:08:28.000 | I believe Jacob-- let me double-check that.

00:08:30.320 | Yeah, this is a question from Jacob in North Carolina.

00:08:32.560 | Do you all have any advice or recommendations

00:08:34.800 | for how to handle taxes on crypto

00:08:36.880 | as tax season approaches?

00:08:38.440 | I had my first foray into DeFi last year

00:08:40.440 | and have quickly realized that the large number of transactions

00:08:43.140 | makes calculating my realized gains completely

00:08:45.240 | untenable without some sort of software automating it.

00:08:48.360 | This is a good one.

00:08:49.400 | So we get emails on a wide range of topics--

00:08:51.560 | markets, and the economy, and personal finance,

00:08:53.520 | and retirement accounts, and all this stuff,

00:08:54.800 | and different types of investments.

00:08:56.240 | By far, the biggest-- and we just

00:08:57.640 | had someone go through our inbox and totally clean it out

00:09:00.840 | and put these different questions

00:09:02.840 | into different categories.

00:09:03.920 | And by far, the biggest category is taxes.

00:09:06.480 | This is why we have our man, Bill Sweeton, all the time.

00:09:08.800 | So let's bring Bill on.

00:09:11.120 | He's our tax expert.

00:09:12.120 | Hey, Bill.

00:09:12.720 | Yeah, good to be back with you again.

00:09:14.480 | Who would know?

00:09:15.120 | Tax question's really popular in late February.

00:09:18.080 | Yes, I think it's a lot of that because we're

00:09:19.800 | getting closer to that.

00:09:20.840 | But I mean, I guess people just hate paying taxes almost more

00:09:26.560 | than they enjoy making money.

00:09:28.240 | So that's why people-- it's such at the forefront.

00:09:29.960 | People just hate paying taxes.

00:09:30.920 | And you know this.

00:09:31.760 | How dare you steal my take?

00:09:33.440 | How dare you?

00:09:34.720 | But the only thing I really know about taxes and crypto

00:09:37.720 | is there's no wash sale rule.

00:09:38.920 | So if you wanted to sell now that crypto is lower,

00:09:41.400 | you could sell your Bitcoin, or Ethereum, or whatever,

00:09:44.480 | and buy it back immediately, and just lock that gain in

00:09:46.880 | for tax purposes.

00:09:47.680 | That's the extent of my knowledge

00:09:48.760 | for taxes for crypto.

00:09:49.640 | What else is there to know?

00:09:50.880 | Correct, yeah.

00:09:51.480 | Fails the Howley test.

00:09:52.560 | It's not a security.

00:09:54.080 | So let's talk basics, though, Ben,

00:09:56.160 | because this is a great question.

00:09:57.640 | And crypto's a really volatile, really wild asset class,

00:10:01.000 | really a lot of fun in the wild, wild west there right now.

00:10:03.360 | Basics, what did you pay for the token when you bought it?

00:10:06.200 | What's your cost basis?

00:10:07.760 | When did you sell it?

00:10:08.720 | What's the exit on sale?

00:10:09.920 | And that gets complicated.

00:10:11.000 | I'm going to talk about that in a second.

00:10:12.720 | And then the dates on when the purchase happened

00:10:15.000 | and the sale happens, that's very important

00:10:16.920 | because that determines short-term or long-term

00:10:19.200 | capital gains.

00:10:20.240 | So pretty simple and a real easy example.

00:10:22.320 | I buy Bitcoin for $6,000, one Bitcoin, in February 2020.

00:10:26.560 | I sell it this morning in February 2022 for $36,000.

00:10:31.520 | I got a $30,000 gain.

00:10:33.000 | Congrats, right?

00:10:34.160 | Guess what?

00:10:34.640 | You owe 15% long-term capital gains tax on that asset.

00:10:37.720 | So you need to cough up about $4,500 of federal tax.

00:10:41.480 | But what makes this really complex

00:10:42.960 | is when have you actually sold the token?

00:10:44.680 | And this is what a lot of folks that

00:10:46.280 | are kind of noobs in crypto land don't get.

00:10:48.400 | If you sell it for cash, that's the obvious example.

00:10:50.760 | What happens if you trade one currency for another?

00:10:53.160 | You flip your Bitcoin for Ethereum.

00:10:54.800 | Guess what?

00:10:55.760 | That's a taxable transaction.

00:10:57.360 | Let's say you use your Ethereum to buy something.

00:10:59.560 | Let's say it's some asset, pizza.

00:11:01.560 | It's a classic example from back in the day.

00:11:03.760 | That's a taxable event.

00:11:05.080 | If you get airdrop tokens from a hard fork,

00:11:07.160 | if you do any staking or mining, that's taxable income.

00:11:10.040 | Or if you get paid in cryptocurrency

00:11:11.960 | to do a job, to do a gig, that is taxable income.

00:11:14.880 | So all this stuff matters.

00:11:16.400 | Let me cut to the chase.

00:11:17.600 | There's a really great platform that I use called Taxbit.

00:11:20.560 | This is not an endorsement, but I

00:11:22.320 | am familiar with the platform.

00:11:23.720 | And it's great, because if you're

00:11:25.360 | able to link all of your custodian's wallets

00:11:27.480 | in one place, it'll give you some really awesome tax

00:11:30.120 | reports, including Form 8949, which

00:11:32.720 | you're going to need for your 2021 income tax return.

00:11:35.480 | What if you are taking your Ethereum and buying NFTs?

00:11:38.960 | Yeah, that's it.

00:11:39.720 | So again, you're flipping one token for another.

00:11:41.720 | Is the IRS really on top of this, though?

00:11:43.440 | Like, do they know what's going on?

00:11:44.900 | Like, if you're in there flipping,

00:11:46.440 | if you're staking in DeFi land and you're

00:11:48.440 | using your Ether to buy NFTs, do they

00:11:51.040 | have any idea what that is?

00:11:52.520 | Or are people skirting tax laws at this point in there?

00:11:55.740 | Are people skirting tax laws?

00:11:57.600 | Like, if I pay my contractor in cash,

00:11:59.520 | he's reporting that all the time as income, right?

00:12:02.680 | What makes cryptocurrency really interesting, Ben,

00:12:04.880 | is that it's there on a chain, right?

00:12:07.160 | And so this is public to the extent

00:12:09.240 | that you can look at an address and you

00:12:11.400 | can see a transaction, right?

00:12:13.000 | So is the IRS-- are there agents in the IRS

00:12:15.520 | that have time to take a look at your Coinbase wallet

00:12:19.040 | and determine that you made a taxable transaction?

00:12:21.600 | I mean, God's honest truth is probably not.

00:12:23.520 | They're still processing somewhere

00:12:24.840 | in the neighborhood of 8 or 10 million tax returns from 2020.

00:12:27.920 | If you send them an 83(b) election or a form,

00:12:29.880 | I get those back about seven months later.

00:12:32.040 | So that gives you an indication of how far behind the IRS is.

00:12:34.740 | But they're catching up, and they're catching up every day.

00:12:37.200 | And we're going to talk about this a little bit later.

00:12:39.420 | But there's a pretty big bomb coming January 1,

00:12:41.600 | 2023, when all this stuff is going

00:12:43.240 | to start getting reported to the IRS.

00:12:44.860 | And you can run, but you can't hide.

00:12:47.080 | What level do you think Coinbase would need

00:12:49.680 | to get to stock market-wise before all of their best talent

00:12:53.440 | jump ship to the IRS?

00:12:54.840 | [LAUGHTER]

00:12:57.160 | Yeah, unfortunately, the pay scale

00:12:58.920 | is a little different there.

00:13:00.080 | They don't tend to compensate you.

00:13:01.560 | I don't think the IRS is going to be paying anyone

00:13:02.960 | in Bitcoin, either.

00:13:03.880 | No, it's government service, too.

00:13:05.480 | But yeah, and again, we should charge them for this spot.

00:13:07.880 | But check out taxbit.com.

00:13:09.320 | That's the best platform that I've found for my personal use.

00:13:12.600 | It's not an endorsement.

00:13:13.600 | So do your due diligence on that.

00:13:16.280 | Let's do the next one, Duncan.

00:13:17.520 | Cool.

00:13:20.020 | OK.

00:13:21.120 | So up next, we have a question from Bill.

00:13:26.120 | Not this Bill.

00:13:27.200 | What is a good tax-efficient strategy

00:13:28.920 | for withdrawing from a 401(k), Roth IRA, and traditional IRA

00:13:33.520 | while receiving a pension until eligible for full Social

00:13:36.560 | Security benefits at 67?

00:13:38.720 | Not expecting to need large withdrawals to live on.

00:13:41.940 | This is another topic that's come up quite a bit is

00:13:44.320 | taking the assets down.

00:13:45.400 | Blair and I talked about this on the last show a little bit.

00:13:47.960 | And so people trying to figure out,

00:13:49.960 | yes, I've accumulated all these assets, but now what?

00:13:52.040 | How do I take them out?

00:13:53.800 | Are there good rules of thumb for this kind of thing?

00:13:55.960 | Different accounts you want to take out earlier or later,

00:13:57.960 | spread them out a little bit, a little each?

00:13:59.240 | What do you think?

00:13:59.960 | Yeah, we covered this about three weeks ago.

00:14:01.800 | It's a similar question.

00:14:03.080 | Let me just start quickly, though.

00:14:04.520 | Let me push back on the premise.

00:14:06.080 | Each year that you defer on your Social Security

00:14:08.280 | benefit from age 62 all the way out to age 70,

00:14:11.040 | you get an extra 8% a year.

00:14:12.840 | There is nothing magical about full retirement age

00:14:15.200 | outside of some other filing requirements.

00:14:17.280 | If you file at 68, you get an 8% lifetime boost for your income.

00:14:21.360 | So you do need to judge that, though, on life expectancy.

00:14:24.400 | But if you expect to live till 83 or longer,

00:14:27.520 | and you look at family history, it probably

00:14:29.400 | makes sense to wait till 70.

00:14:31.360 | But that said, I think it's important to think about,

00:14:35.120 | how does this taxation work?

00:14:36.580 | And if you're able to live on a lower pension,

00:14:40.200 | that means your taxable income is probably low.

00:14:42.440 | Duncan, John, can you pull up my chart?

00:14:44.320 | JG, let's do this thing.

00:14:47.120 | Tax brackets matter.

00:14:48.360 | And we talked about this, though, the last time

00:14:50.320 | that we had this call.

00:14:51.400 | There's a really big tax jump that

00:14:53.160 | happens around the 22% tax bracket.

00:14:55.600 | This is a merrily fine joint couple.

00:14:57.520 | The pointed arrow is pointing to where

00:14:59.440 | you go from 12% to 22%.

00:15:02.040 | That, to me, is a really magical place

00:15:04.360 | to think about in the tax code, assuming that your pension is

00:15:06.820 | below that amount.

00:15:07.880 | Because you can take assets that are in traditional IRA

00:15:10.920 | that you have to start taking distributions from at age 72.

00:15:14.300 | And front load those in the present.

00:15:16.120 | And so if your income falls below a certain threshold,

00:15:18.600 | I would always look at that.

00:15:20.080 | The very first Portfolio Rescue episode I was on, Ben,

00:15:22.680 | do you remember what the tattoo on my back reads?

00:15:25.640 | Roth IRA, right?

00:15:26.440 | Roth IRA conversion.

00:15:27.680 | You're damn right.

00:15:28.600 | And so that's the thing to think about.

00:15:30.400 | Once you convert that asset to Roth,

00:15:32.080 | you no longer have to pay tax on it again.

00:15:34.200 | And so if you expect your income to be higher in the future

00:15:37.700 | after you file for Social Security benefits,

00:15:39.500 | it makes sense to front load some distributions

00:15:41.680 | or contributions in the present.

00:15:43.040 | But unfortunately, like everything in tax,

00:15:45.500 | it all depends.

00:15:46.700 | All right.

00:15:47.180 | OK.

00:15:47.940 | Let's do one more, Duncan.

00:15:49.160 | OK.

00:15:50.020 | So up next, question four we have

00:15:52.900 | is from James, who writes-- this is a fun one.

00:15:56.020 | I hold season tickets for an NBA team.

00:15:57.820 | They don't tell us which one, but I usually

00:15:59.660 | sell a portion of the tickets to recoup some of the costs.

00:16:02.240 | I don't make a profit for the season as a whole,

00:16:04.240 | but for individual games, I will sometimes turn a profit.

00:16:06.900 | Starting this year, Ticketmaster,

00:16:08.340 | where I'm forced to resell, has informed me

00:16:10.740 | that they are filing a 1099K for anyone

00:16:13.460 | who receives over $600 in a calendar year, which

00:16:16.180 | will include me.

00:16:17.300 | Will I need to add ticket income to my tax filing?

00:16:20.140 | And if so, can I deduct the cost of season tickets

00:16:22.740 | against this new income?

00:16:25.020 | This is a strange one.

00:16:27.060 | Michael has season tickets to the Knicks.

00:16:28.460 | I was wondering, shouldn't you get a write-off

00:16:30.140 | if your team doesn't make the playoffs

00:16:31.740 | or they finish under 500?

00:16:33.100 | If you buy season tickets to the Detroit Lions,

00:16:35.640 | the government should be paying you as a citizen

00:16:38.100 | for helping the economy.

00:16:39.140 | Shouldn't you make the owner pay you?

00:16:40.820 | Something like that.

00:16:41.860 | So before we get into this specific one, Bill,

00:16:43.500 | I asked you yesterday, what are some of the strangest things

00:16:45.200 | you've seen on a tax filing?

00:16:46.740 | Because this one would--

00:16:48.180 | I think this one would count, right?

00:16:50.340 | NBA tickets?

00:16:51.220 | What have you seen?

00:16:52.300 | Yeah, twice.

00:16:53.100 | And I talked about this with Bill Arts.

00:16:54.720 | Shout out to Bill A, RCPA in Philly.

00:16:57.340 | I talked about it with him.

00:16:58.460 | The funniest thing I've ever seen twice was mascot expenses.

00:17:03.060 | And so when you're filing somebody's tax return,

00:17:05.280 | you kind of need to ask them questions

00:17:06.820 | when you see something funky like that come across.

00:17:09.260 | So one answer was, it's our company mascot.

00:17:12.100 | And I said, can you elaborate on what the mascot is?

00:17:14.360 | They were like, well, it's a doodle,

00:17:16.940 | and she cheers everybody up.

00:17:18.900 | And so I was like, is that the dog that lives in your house?

00:17:21.540 | And are these actually dog grooming expenses?

00:17:23.740 | He was like, yeah, you got me.

00:17:25.580 | Those, not deductible.

00:17:26.620 | That's a personal expense, sorry.

00:17:28.100 | The more interesting one happened.

00:17:29.540 | Client-- home office, actually, but had a lobby, right?

00:17:32.060 | And so clients would come in.

00:17:33.260 | I think it was a hairdresser or something like that.

00:17:35.220 | People would come in.

00:17:35.940 | They'd sit in a lobby.

00:17:36.580 | And they'd wait.

00:17:37.340 | And the mascot expense was for a fish tank.

00:17:40.580 | And the idea was, well, people sitting in there

00:17:42.620 | waiting for somebody to see something nice to look at.

00:17:45.060 | I actually allowed that expense.

00:17:46.460 | I thought that was reasonable, ordinary, necessary.

00:17:48.980 | I would say mascot expenses.

00:17:50.320 | The other really funky one that I've come across, though,

00:17:52.660 | is anything involving plastic surgery or other-- like teeth

00:17:55.300 | whitening, other personal expenses.

00:17:57.100 | And those typically are a no-no.

00:17:58.500 | But those are the two weird categories that I see.

00:18:00.580 | So what if this YouTube channel sticks around

00:18:02.660 | for another 30 years, and I get a facelift at age 60?

00:18:05.460 | Is that kind of the write-off?

00:18:06.900 | I've got to say, pretty.

00:18:08.300 | I have a face for radio, so you're definitely

00:18:10.100 | speaking my language.

00:18:10.980 | But unfortunately, no.

00:18:11.900 | The IRS is going to determine that to be a personal expense.

00:18:14.580 | It's a personal appearance.

00:18:15.740 | Same thing for clothing.

00:18:16.860 | That's basically anything that's not a costume.

00:18:18.820 | If you can adapt it for civilian use--

00:18:20.700 | if I can wear this shirt to the club,

00:18:22.260 | and I do every Friday night--

00:18:23.940 | that's not deductible to me, unfortunately.

00:18:25.900 | I've got to imagine this person, even though they're

00:18:27.740 | making income, they cannot deduct

00:18:28.980 | the cost of those tickets.

00:18:29.820 | I have to imagine that's a pretty simple one, even.

00:18:31.940 | Yeah, it depends.

00:18:33.060 | So that's, again, the freaking tax thing that sucks.

00:18:35.740 | So just wait till this happens in crypto land, by the way.

00:18:38.220 | That's what I was getting at before-- January 1, 2023.

00:18:40.940 | Brace yourselves, because 1099s are coming from Coinbase.

00:18:44.260 | But leaving that aside, the quick and dirty answer is yes.

00:18:47.540 | You can deduct the cost of tickets,

00:18:49.060 | and you should deduct that against your cost of sales.

00:18:51.380 | However, the way the taxpayer framed this question,

00:18:54.020 | this smells a lot like a hobby to me.

00:18:55.980 | This is not a bona fide business in the eyes

00:18:58.660 | of the Internal Revenue Code.

00:19:00.100 | And what that means is you can and should

00:19:02.260 | deduct the cost of your tickets, but only

00:19:04.260 | to the extent of your income.

00:19:05.780 | If you go beyond that, you might be able to get away

00:19:07.940 | with it for a year or two.

00:19:09.020 | But in order for a business to be bona fide,

00:19:10.980 | in order for you to be able to deduct expenses

00:19:13.660 | beyond your income, you need to be able to prove

00:19:16.300 | that you're in it for a profit.

00:19:17.740 | So to turn it into a business, he

00:19:18.860 | has got to be one of those guys that stands outside the stadium

00:19:20.580 | going, tickets, tickets.

00:19:21.620 | Bingo.

00:19:22.420 | Yeah, and I've never bought a ticket

00:19:23.620 | from one of those dudes.

00:19:24.460 | Have you?

00:19:24.780 | Because--

00:19:25.060 | No way.

00:19:25.660 | I would not trust that.

00:19:26.180 | Yeah, that kind of scares me.

00:19:26.860 | Yeah, definitely.

00:19:27.580 | So but regardless, I mean, if you're just sort of recouping

00:19:30.740 | tickets to cover your cost, that's

00:19:32.420 | probably really bad business in the eyes of the IRS.

00:19:35.580 | So the natural question, again, is this going to be a hobby?

00:19:38.100 | Are you actually trying to generate a profit?

00:19:40.300 | I would probably Boy Scout honor,

00:19:42.540 | like if you want to play this straight,

00:19:44.140 | report it as a Schedule C entity on your tax return.

00:19:47.620 | Report the total income on 1099(k).

00:19:49.660 | Match that with an expense that has no impact on your tax

00:19:51.980 | return.

00:19:52.700 | Move on down the road.

00:19:54.420 | And you should also always drive below the speed limit.

00:19:57.100 | Cook your burgers to 500 degrees Fahrenheit

00:19:59.220 | and drink 40 gallons of water a day.

00:20:01.380 | But this kind of thing, we'll see.

00:20:03.020 | I don't know how serious the IRS is going to take it.

00:20:05.220 | So I think as taxpayers, we got to play by the rules, guys.

00:20:07.740 | Come on.

00:20:08.540 | My season tickets are buying a nice big TV

00:20:10.580 | that looks good in HD.

00:20:11.900 | Yeah, and curiously, that's the ticket.

00:20:13.620 | You have a better view in most cases.

00:20:15.220 | Yeah.

00:20:15.720 | Yeah.

00:20:16.220 | All right, Bill, you served your country.

00:20:18.580 | You've been involved in military conflict before.

00:20:21.180 | I'm just curious, what are your thoughts and feelings

00:20:23.580 | on the day like today?

00:20:24.620 | Yeah, not to be a downer, but I'm horrified.

00:20:27.180 | We have not seen large-scale war of this magnitude

00:20:30.060 | since 1945 in Europe.

00:20:31.820 | I have a very good friend who's the best man at my wedding who

00:20:34.440 | is deploying to Eastern Europe today.

00:20:36.340 | So I would just say, everybody out there,

00:20:38.380 | it sounds so trite, but this is a moment

00:20:42.420 | that should connect humanity.

00:20:43.860 | And ultimately, I pray for the free people of Ukraine.

00:20:46.700 | And I hope this all ends very quickly and satisfactory,

00:20:49.660 | because this is very serious business.

00:20:51.500 | So thank you.

00:20:52.340 | Please pray for my friend.

00:20:53.860 | His name is Todd.

00:20:55.140 | Right, well said.

00:20:56.500 | All right.

00:20:57.500 | Thanks, everyone, for watching.

00:20:58.780 | Duncan, are we going to do the giveaway now?

00:21:00.780 | Yeah, yeah.

00:21:01.340 | So like I said, if you've been putting #100k, lowercase k,

00:21:05.980 | into the chat, we're going to pull from that here

00:21:08.780 | in a second with this cool little feature

00:21:11.340 | that StreamYard has.

00:21:13.060 | Wow, look at the odds here.

00:21:14.520 | Only 40 people entered today.

00:21:16.020 | Wow, we had like 300 and some the other day.

00:21:19.180 | So yeah, that's a pretty good odds.

00:21:21.180 | Roll those dice.

00:21:22.220 | So yeah, let's go for it.

00:21:24.060 | Let's hit it now.

00:21:26.940 | Did you rig this, Duncan?

00:21:28.620 | I wish I was good enough coding to be able to rig this.

00:21:32.660 | The question is, is this taxable income to Bits of Interest?

00:21:35.620 | OK, long time, long time viewer.

00:21:37.900 | I definitely recognize their profile pic from the chat.

00:21:40.780 | Your 1099k is in the mail.

00:21:42.100 | Congrats.

00:21:42.740 | So yeah, so send us-- yeah, this is a taxable event, obviously.

00:21:45.820 | No, I'm just kidding.

00:21:47.180 | But so send us an email at askthecompoundshow@gmail.com

00:21:51.860 | with your address and your shirt size.

00:21:54.740 | And we'll get the shirt sticker and mug.

00:21:58.540 | Ben doesn't drink coffee mug in the mail to you.

00:22:00.920 | So yeah, congratulations.

00:22:02.000 | This is something I think we'll do more moving into the future.

00:22:05.260 | But today was to celebrate the fact that we're almost at 100k.

00:22:08.700 | And hopefully by the end of the week, we'll be at 100k,

00:22:11.440 | because that's what I said on what are your thoughts.

00:22:13.660 | All right, we're getting there.

00:22:14.660 | All right, if you have a question for us,

00:22:16.400 | especially correction-related.

00:22:18.220 | I'm sure a lot of people have a lot of questions right now.

00:22:19.540 | The market's falling.

00:22:20.580 | We're in a crisis.

00:22:21.340 | Send us a question.

00:22:22.180 | Askthecompoundshow@gmail.com.

00:22:24.300 | Thanks again to Bill for always being our taxman.

00:22:27.620 | Thanks to Duncan.

00:22:28.380 | And we'll see you next week.

00:22:29.860 | See you, everyone.

00:22:32.620 | [MUSIC PLAYING]

00:22:35.980 | [MUSIC PLAYING]

00:22:39.500 | [MUSIC PLAYING]

00:22:42.860 | (upbeat music)

What Causes Market Sell-Offs? | Portfolio Rescue

Chapters