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Mark D
Mark D, Enrolled Agent
Category: Tax
Satisfied Customers: 1249
Experience:  MBA, EA, Specializing in Business and Individual Tax Returns and Issues
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I've got one I can't seem to find a good answer to online,

Customer Question

I've got one I can't seem to find a good answer to online, sort of the opposite problem most people have. I have a ton of capital losses (more than I expect to be able to offset with gains over the rest of my life). I was wondering if there are some creative ways to monetize these losses. Is there some way to structure something with someone who has a lot of gains and they could effectively pay me to be able to use my losses? Or is there an investment where people are willing to pay something to defer their taxes and I could take the other side of that trade?
Submitted: 10 months ago.
Category: Tax
Expert:  Mark D replied 10 months ago.

The way I look at this situation, you have few options since cap losses are non transferable:

1. If someone very generous wants to gift you appreciate assets like stock, you could sell and offset with your losses. Would need to be a bonafide gift

2. Invest in something that produces income treated as capital gains. This could be appreciating assets of something that creates Sec 1256 gains (futures). Of course, this comes with investment risk

3. I mention this one half-jokingly, marry someone with appreciated assets. Of course, this should be a legit marriage...

You are really very limited and it's a shame that capital losses cannot offset ordinary income.

Customer: replied 10 months ago.
I don't think that answers my question. 1 and 3 are obviously not serious responses. I'm not sure how 2 helps me either - I could use my losses by having some gains? I already know that I can offset future gains, but as I said I don't expect to have enough of them to offset the losses that I have now. I'm really wondering if there's some type of investment that people make to defer their taxes (which they would have to pay to do,otherwise everyone would do it every year and no one would ever pay taxes), that I could take the other side of.
Expert:  Mark D replied 10 months ago.

1 is a very serious answer and it happens between family members often, and can be the other way around with you selling appreciated assets to family at FMV. In fact there are articles on it. See the article below.

3 was stated tongue in cheek as stated since it would only apply to people in a very specific situation.

I think my 2nd point was not fully appreciated. The goal was to demonstrate that there are investment structures that can produce income treated as capital gains that the layman would not consider capital gains. Section 1256 gains is a very popular treatment that can be used to munch up some of those capital losses. These can be short-term investments in futures or FOREX. Alas, there is investment risk, but the point being you do not just need to limit yourself to buying and selling stock to produce capital gains.

I get what you are asking about the "some type of investment that people make to defer their taxes " are essentially trying to find a way to use your losses to someone else's advantage, and financially benefit from it. Please tell me if I am wrong. With personal cap loss carryovers, other than describes above, there would be no such way while staying within the law.

I hope I have been helpful

https://www.firstrepublic.com/community/life-and-money/wealth-transfer/gifting-to-family-members-pitfalls-and-benefits

Customer: replied 10 months ago.
I still don't understand how #2 helps. Isn't that just saying that gains on futures are capital gains too? Also, since those gains are 60/40 I think I'd be offsetting long term gains with short term losses (my losses are short term) which seems like not the best use of those losses (I think I'd always want to be offsetting short term gains, regardless of the type of losses I have). Or are you suggesting a specific type of trade? (It sounds like you're not.) As for that second paragraph, you're right. I assume there are trades that people can do with different assets classes in order to effectively defer a gain from this year to next year - recognize a loss this year in exchange for taking a gain next year. I would also think that there would be a cost to doing a trade like this, since the other side of the trade has to be willing to recognize a gain this year in exchange for taking a loss next year, which nobody would have a reason to do for free. How about if I ask this a different way - is there a trade that someone could do that would result in him deferring his gain by taking a loss this year and recognizing the gain next year (I could then try to be the other side of that trade)?
Expert:  Mark D replied 10 months ago.

1. Yes, using short term losses to offset long terms gains is usually bad, but beats the heck out of using $3K a year for the rest of your life. If you had stated you had limited losses, I would not have proposed this, but you said you had more losses than you could probably use in your lifetime. I'd take the essentially tax free income using my losses.

2. I do not have specific investment advice for you. I do not give investment advice. I am stating some types of investments you could consider in you effort to utilize your capital losses.

3. I'm not sure I will satisfy you question with my answer here. There is no legit way to do what are you trying to do. The IRS would deem that a disguised transaction (no economic substance)) in a heartbeat if looked at. If there were a legit way, there would be articles splattered all over the internet by reputable companies about it. Avoid the person who wouldn't recommend a structure in public.

I hope this answers you question. if so, please rate. If not, let me know and I will opt out.

Customer: replied 10 months ago.
I appreciate the conversation, but I don't think you really told me anything other than that I need to have some capital gains.
Expert:  Mark D replied 10 months ago.

Other than the couple of side discussions of asset transfers through gifts and sales, that really is the answer. I cannot create an answer that does not exist. Please let me know if you would like me to opt out and let another expert have a go.

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