Yeah I'm in favor of leverage == taxable event. I think the meaningful difference between leveraged and unleveraged capital gains is that when you take a loan, you access liquidity via your ownership in the asset. If you had gotten a dividend, that would have been taxable. A loan with a stock backing it isn't the same thing, but it does have a somewhat similar effect.
You still need to pay off that loan eventually though.
These asset backed loans are just regular loans with lower interest rates. So instead of getting $50M @ 11% they can get it at 4%. That's the extent of the "hack".
They then keep the ball rolling by refinancing at each expiry and just paying the interest (and hoping their assets maintain or increase in value)
Eventually those loans will need to be repaid and the money will need to come from realizing capital gains.
So if anything its a tax deferral scheme with a low interest rate and elevated liquidation risk. Which all raises the issue of being taxed twice on the same money. Taxes once when you take the loan against it, and taxed again when you realize the profit to pay the loan.
The trick is that the USA steps up the buy price of an asset when you pass away. So if you use cheap loans your whole life, you can defer capital tax until it goes away.
Instead of two certainties in life being death and taxes, it's now death or taxes.
Eventually those loans will need to be repaid and the money will need to come from realizing capital gains.
Uh, yes. But they can be repaid with refinanced loans based on the same assets... So no guarantee that the gains will be realized. And in the possibly long interim between loan issuance and maturity, the owner accesses liquidity via the asset and pays nothing in taxes.
Which all raises the issue of being taxed twice on the same money. Taxes once when you take the loan against it, and taxed again when you realize the profit to pay the loan.
To clarify, I advocate that the loan issuance be a taxable event, where the cost basis of the shares are adjusted to the current price of the asset. So there would be no double taxation.
I think it is useful to point out that the conditions under which those loans make any sense are incredibly narrow. It is far from the norm because it doesn’t pencil out in pure financial math. Wealthy people are not stupid, and the notion that this is being widely used as a tax avoidance measure tacitly makes that assumption. Studies seem to indicate that the prevalence is so low as to round to zero. There are many practical reasons to do it at the margin as a cashflow management exercise but not as a way of generating tax-free income.
The interest on those loans is taxed as income which feeds back into the model.
> Taxes once when you take the loan against it, and taxed again when you realize the profit to pay the loan.
Trivially fixed by simply letting you deduct the taxes paid when you took out the loan against the taxes owed when you actually sell.
While we're at it lets ban stock buybacks since all those are is a tax deferral scheme with utterly no other social purpose. Dividends are the correct way to distribute cash to shareholders. Full stop.
And get rid of stepped up cost basis on death - limit it to the IRS gift limit which is already ridiculously generous. Just to make it politically palatable so there are less sob stories about some "family" farm or company being force-liquidated to pay taxes.
I take a loan secured against 10% of them. I have now taken a tax event against 10% of them.
I now pay taxes on a capital gain of $90 on 10% of them.
I now have an asset split into 2 parts. one with a cost basis of $1 (90% of my assets) and one with a cost basis of $100 (as I paid taxes on a capital gain to $100).
One can perhaps argue that when levaraging unrealized assets for loans, one always uses the lowest cost basis assets for determining taxable event, or perhaps first in first out of taxable events (and therefore paying tax, is an out then an in).
It doesn't require the debtor to pay back the difference between the collateral liquidation value and the loan value.
I don't think any bank though is giving non-recourse loans for risky or depreciating assets (investors do that). It's usually for things that the bank is confident will be a good investment anyway if the loan goes sour - you default on the loan? Fine. But we keep the land.
For late-stage “startups” (e.g. Series D+ companies that have just not IPOd) they have done this in the past, but that was in the pre-COVID tech mania.
Often they act as middleman, finding someone else that wants exposure to the startup when interest is oversubscribed.
I don’t get how loans can help you “evade” taxes. At some point you have to settle your position. They can help you delay but not avoid the taxes. (Unless I am missing something)
You time receiving the money specifically so that you don't hit the next tax bracket, which has a higher tax rate. If you get $1,000,000 in one year and $0 the next, you'd pay more in taxes than two years where you get $500,000 and $500,000 (approximately. don't focus on the exact numbers, but that's the concept).
Why not? I could say the that it is unfair to tax people on income that they haven't spent too. Or property taxes raising for a property they haven't sold. If I wait to pickup my payroll check until after the year rolls over despite earning that money already, should I not pay taxes on it for that previous year?
Because the valuation of equity is notional only. It may not be remotely realizable now or ever. Furthermore, it may not be possible to use it as collateral for a loan for both legal and practical reasons. Some notionally high value assets have no liquid market. It make take a decade to find a real buyer. The large majority of assets held by wealthy people are non-liquid, in the US most studies put it in the 60-70% range.
Your paycheck is denominated in cash money. It can’t go to zero or be non-liquid for years like an investable asset. That’s a rather important distinction.
That seems like a buyer beware situation. Nobody forced them to invest money in it, and if they lose out in the end that is the risk they take, the same with any other investment. You can't buy a piece of commercial property and not pay any taxes, or start a business and then claw back taxes you already paid because it failed later on down the road.
It would probably need a grace period so things don't go crazy, but after that then yes. It would also have the benefit of pumping stocks being lower and more risky, and could help prevent stock bubbles from rising so big and fast.
That is typically the case (depending on the timeline) for all but publicly traded or relatively sought out/well known private firms. Even for many of those, it’s not going to be easy.
You can’t just go out and start selling stock to the public without a huge amount of legal paperwork.
If you're bootstrapped, borrow a bunch of money to pay tax because your company got to $10M val. But then the market shifts and it goes back down to $0 in later years, do you get the money back?
Even if you do, it sounds weird taxing someone for the right to create something, especially when they're still in the middle of creating it.
