Take advantage of creative ideas when the market is falling
There are many ways to lose money. Take Mary Holmes for example. Ms. Holmes was a Powerball lottery winner in 2015, winning US$188 million by bailing her multiple-time boyfriend (drug dealer Lamar “Hot Sauce” McDow) out of prison and then rapidly burning through some of her winnings. The bailouts cost him US$21 million.
Others have lost money in more traditional ways – such as a collapse in the equity markets. At the time of writing, the S&P 500 is down more than 18 percent year-over-year and the S&P/TSX is down more than 7 percent. The difference between losing money in the market and paying a friend’s bail money is that the former can actually lead to some creative planning ideas. Let me share seven thoughts today.
1. Realize the loss to recover the taxes paid. Take a look at the tax returns you have filed for 2021, 2020 and 2019. Have you filed any capital gains on any of these returns? If so, and if you currently have unregistered investments that have declined in value, you may realize some capital losses by selling off some of your loss-making ones. When you file your tax return for 2022 you will be able to claim those losses and carry the loss back to 2021, 2020 or 2019 to recover the taxes you paid on capital gains in those years Huh.
2. See the superficial damage rule. If you are going to sell some losers to realize capital losses, be aware that your loss may be forfeited if you sell the investment at a loss, but you, or someone associated with you ( For example, your spouse), reclaims the same securities. Period that begins 30 days before your sale and ends 30 days later. But the loss doesn’t last forever. The disallowed loss is added to the adjusted cost basis of the newly acquired securities, which will reduce the capital gain or increase the subsequent capital loss when the investment is eventually sold.
3. Transfer the capital loss to your spouse. If you have investments that have fallen in value, but you don’t have capital gains to use the losses, you can transfer the unrealized capital losses to your spouse if he or she can use them. How? Step 1: Sell your losers on the open market. Step 2: Your spouse should reclaim the same investment within 30 days. It will deny your loss under the superficial damages rule. Your spouse will have an adjusted cost basis in the newly acquired investment that has been hit with the loss you denied. Step 3: Your spouse can then sell the investment and realize a capital loss that they can use. Your spouse must wait until after the 30th day after Step 1 before selling.
4. Consider an asset freeze. An asset freeze involves taking certain assets and “freezing” them at today’s value. Future growth of assets is usually to your children, or to a family trust you control. A freeze can limit your tax bill upon death, among other benefits. The best time to freeze is when assets have a low value, so that more development in the future is in the hands of children or trusts. Freeze does not mean control over, or use of, an asset or future development. Talk to a tax pro about it.
5. Play dead when you see the bear. When you see a bear, how do you react? There is an old saying that when you see a bear market, just play dead. I am talking about staying calm and not taking any sudden steps. If you have a long-term investment horizon, you can count on the markets rising over time. Selling low and then buying high again is a recipe for eroding money.
6. Take advantage of dollar cost averaging. If you have cash available, is it time to invest it in equity? Well, if you had a crystal ball, you would have found your answer. Author and hedge fund manager Ray Dalio wrote: “He who lives near a crystal ball will eat a broken glass.” Instead of trying to predict when we hit market lows, consider the approach of buying equities systematically over time, which allows you to average out your cost amount over that period.
7. Use cash to pay off debt. When you pay off the loan, you will enjoy a guaranteed rate of return equal to the after-tax interest cost on the loan. Who doesn’t want guaranteed returns when the market is down today? And the higher your interest cost, the higher your guaranteed return. If you have cash, look to get rid of some of your debt.
Tim Sestnik, FCPA, FCA, CPA (IL), CFP, TEP, is a writer, and co-founder and CEO of Our Family Office Inc. He can be reached at
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