TAKING STOCK: Pot earnings and Chinese issues


Dear Mr. Berko:

Our 13-year-old son, on the advice of our family physician, uses marijuana, and it's been a godsend. I seldom speculate but had an $11,600 short-term gain on three marijuana stocks our broker bought and sold for us last year. Our accountant told me that I can deduct the $3,630 we spend on medical marijuana, but our neighbor, who is a CPA for one of those monster firms, tells me we can't. Calling the IRS is worthless because no one ever answers the phone. I don't want to invite an audit, so my husband and I would like to have your opinion on pot's deductibility as a medical cost.

Now, I decided that I would use the $11,600 capital gains to speculate in Chinese stocks because that economy is growing twice as fast as ours. So the broker recommended two exchange-traded funds, and I would also appreciate your recommendations and comments.

-ST, Vancouver, Wash.

Dear ST:

Last year, a Financial Industry Regulatory Authority lawyer with whom I keep in touch told me he has been deducting his medical pot costs for two years. However, a semi-big shot I know at the IRS told me, "Medical marijuana costs are not tax-deductible on a federal tax return, even if the user lives in a state where it is legal." Of course, even recreational pot is legal in Washington state, where you live. Most folks believe that it should be legal in Washington, D.C., too, where the legislators who make and complicate our laws would be much more effective if they'd all just get a bong.

You're required to report the $11,600 capital gains as ordinary income on your three hot pot stock picks. However, "vested interest" is the significant reason that pot remains illegal in many places. Legalizing pot would require that massive numbers of law enforcement officers be retrained, and some say that 40 percent of Drug Enforcement Administration employees would have to be laid off. And if pot were to become legal everywhere, our clergy would have to return to clergy school for refresher courses and to be re-indoctrinated. Finally, because more than 50 percent of the federal prison population is there because of drug-related offenses, prison release programs would dramatically reduce the number of inmates. Prison wardens around the nation would have to cancel lucrative contracts with local suppliers, lay off thousands of employees and begin competing with other prisons for inmates. Pot, like alcohol (also used for medicinal purposes), supports an enormous nontaxable underground economy and contributes significantly to the gross domestic product.

Now, I like Chinese food, especially hot-and-sour soup. But I don't trust Chinese management practices, Chinese accounting standards or the Chinese government. The practiced Chinese system of misdirection, bribery and cronyism has survived for thousands of years and makes corrupt Latin American corporate officials look like buffoons. Even if you could read each of China's 56 recognized languages and understand a balance sheet in Mandarin and an income statement in Han, purchasing Chinese equities is like playing roulette on a tilting table. In the past, foreigners had access only to issues listed on the Hong Kong exchange or U.S. exchanges, primarily export and energy companies. However, last November, the Shanghai and Hong Kong exchanges were linked, exposing over 600 new issues to foreign investors. Therefore, I like your broker's two exchange-traded fund recommendations: Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR-$48.72) and Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS-$54.19).

ASHR, a $1 billion ETF, began trading at $25 in November 2013. It tracks the performance of the CSI 300 index's large-cap issues, representing China's largest banks, brokerage firms, construction and industrials companies. This volatile ETF, run by Germany's Deutsche Bank, was plus 51.4 percent last year.

ASHS came to the market in March 2014, also at $25. It is run by Deutsche Bank, too, and tracks the performance of the CSI 500 index's small-cap companies. Most of the 500 companies in this index have an average market capitalization of less than $2 million. Though more volatile than ASHR, ASHS' small portfolio, worth $31 million, is weighted primarily in the industrial and technology sectors, and its one-year performance record is plus 49.2 percent.

Zhu ni hao yun!


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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Published: Tue, May 05, 2015