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Abstract: 

Corporations and individuals sometimes generate capital losses that are not currently deductible because they aren’t able to generate sufficient capital gains to fully utilize the losses. Individuals sometimes donate property to charity but aren’t eligible for a charitable deduction because they can’t generate sufficient Adjusted Gross Income (AGI) to overcome the AGI percentage limitation. In such situations, there is often a strong possibility that these potentially valuable deferred tax assets may expire worthless. This article describes a capital markets-based strategy that may prove helpful to corporations and individuals facing this dilemma. If structured and executed properly, the strategy can not only generate an attractive profit, but also accelerate the utilization of these otherwise non-deductible deferred tax assets in danger of expiring worthless. This article presents a potential solution for taxpayers facing the likely expiration of capital loss carryovers. Strategic use of a short position in U.S. Treasury bonds with a fairly short maturity and trading at a premium to par, in a rising-interest-rate climate, can not only protect against higher interest rates and inflation’s depredations, but also enhance the odds that a company’s stock price will rise in the market. Additionally, for philanthropically minded individuals, this strategy should enhance the likelihood that a charitable deduction will be available, and for corporations the strategy might also help management to meet its corporate governance obligations.

Keywords: capital gains, non-deductible deferred tax assets, loss carryforwards, AGI percentage limitation, interest rate fluctuation

Affiliations:  1: Intelligent Edge Advisors; 2: Intelligent Edge Advisors.