If I'm understanding correctly, the "no tax" method is more like "pay tax later + bank interest". Once he's spent his borrowed money, he still has to pay back the bank (with interest), and to do that he has to sell his stocks. So then we're back to the "less tax" scenario.
Yes, the no tax person takes out a new loan and pays off the old loan with the new loan money. The loss in bank interest is lower than the appreciation of their stock.
Yes it’s called “cross-collateralization,” but also it’s unlikely that you would need to put up all of your stocks all at once just for liquid funds, more likely you can just shuffle your portfolio around.
That makes sense. That said, if you can't access the full value of your stocks because you have to keep some available to shift around, then are you really better off than if you paid the tax and had the rest fully accessible? Money you can't use is the same as not having that money.
The thing is they have way more money (particularly in stocks) than they can use. It’s frankly hard to spend money after a certain point without doing pointless stuff like buying extra yachts or whatever.
Strange thing to say, since you only pay cap gains when you sell it. If it was always going up, as stocks in aggregate do, then you would be better off collateralizing it.
Interesting. So hypothetically, say I buy a stock, but I never sell it. When I die the stock has doubled in value from when I first bought it. The stock is then transferred to my kid. The capital gains tax liability on that doubling in value just disappears?
Well, they still pay tax under the 'No Tax' situation. The graphic is a little misleading in that regard. But, I think it's imprtant to factor in Payroll Taxes when thinking about this issue. There are no Payroll Taxes (Social Security and Medicare) imposed on Income from Capital Gains.
More crap-corrections: (4) in the Less Tax option, employee pays higher regular income rate on all the stock basis (1 million), but capital gains rate only on gains IF ANY (and even then probably higher than 25%, because of AMT); (5) *of course* debt is not real income, it's an obligation to repay.
Your No Tax option is misleading in several respects, because (1) CEOs are VERY far from the only employees getting stocks and options; (2) the employee pays interest on the loan in place of present taxes; (3) the employee pays capital gains taxes when he sells, *exactly* as in the Less Tax option.
1) covered in the middle column 2) you would be surprised how low interest is when you have a lot of money 3) they don’t do that, they take out a newer and even better loan on the appreciating stock and pay off the previous loan.
True. A lot of them do the same by investing in real estate and using the IRS 1031 loophole to never pay tax as long as they reinvest into more real estate, which they can then use as collateral for loans that they never pay income tax on. Something like that.
MIsleading, because he gets to keep zero of what he borrowed, and has to pay interest on the loan as well - sort of a 100+% tax.
He still has all his stocks, but he can never sell them and spend the earnings without getting hit with the capital gains tax.
When critics of a wealth tax argue that it is too complicated or that it is unfair to tax unrealized capital gains since the paper gain may not be realized. Remember the banks who loan money against the unrealized capital gains have figured out a way to do it. That's how Musk got the money to buy US
Thank you for this. I wish that more voters could understand this. Taxing the rich is not a higher marginal income tax rate. The rich are not collecting W2 wages and they are not paying taxes. Maybe a small amount, after they have become incredibly wealthy. Wage earners are taxed up front.
Ok, but help me understand: in this economy, you are we borrowing money at some interest rate. I’ll be kind and say 5%. You borrowed $500k for the years expenses. Nor an accountant but using todays mortgage rates on a 15 yr mortgage, your repayments are like $5k per month. 1/2
2/2. Every year you are deeper in debt. How does this work for “ rich people” sounds like a reverse ponzi scheme that ends with you being deeply in debt and having to sell that collateral when the banks decide they have had enough
In theory yes, but they borrow money at very low interest rates, because the bank knows that they can repay (and if they can't, the bank will seize valuables shares so it's worth). So as long as their shares and properties are growing in value, it's barely an issue.
And this doesn't even mention the step-up in basis when the stockholder dies (not a dig on the good infographic, just more ways to avoid tax for the ultra-wealthy)
Bullshit. At some point that loan needs to be covered.
Those shares get sold. The taxes get paid. The interest gets paid.
This isn't a loophole at all. It's just a very risky delay.
What happens when the shares go down and the bank liquidates your position? And now you also owe the IRS
Yes, I'm familiar with the strategy. It doesn't actually work. Other than estate taxes once you die (unless you're not really that rich), you got compounding interest. Cap gains might be 20% and borrowing might be 5%, but borrowing you pay every year for the same $ borrowed. Cap gains only once.
In fact, almost all tax evasion strategies are illegal. There are very legal tax delay strategies, and you can spread taxacble income on many years, but not full evasion. Not if you consider estate taxes.
However, in the US, the tax collection system is based on trust. Unless you are audited, you can make any claim you want on your tax return.
This is why many people confuse the fact that they 'figured out a way to avoid taxes' with 'they haven't been caught, but it's actually illegal.'
Example:
I sold a private business in exchange for publicly traded company stock. Very common.
My broker (etrade in this case) was notified and the shares were registered to my name. But the broker does not have cost-basis data because they don't know what it cost me to build my business.
Less tax example should be ceo gets 1 mil stock grant. CEO pays 40% income tax on the stock grant and keeps 600k worth of stock shares. CEO holds stock until value of shares climbs from 600k to 1.6 million. CEO sells stock (1 mil additional income) paying capital gains tax of 25% of the 1 mil gain.
It's the U.S. and it's a loophole. For some reason, if I'm given a car as compensation, I owe taxes. If I'm given stock, I only owe taxes when I sell the stock. Makes no sense.
Capital gains taxes were set at 15% if you hold an asset for over one year. If you sell before them they are taxed as normal income.
The idea was to encourage people to focus on long term investments. The reality is we reward people for already being rich and it’s hard to catch up with labor.
Also there is a small variation. Lots of stock is sold at once, and taxed. But for years thereafter those profits are used to payoff things, but no income is reported, there is none.
Re: 3, that doesn’t explain how the money needed to repay the loan magically appears. If stocks are sold that’s taxed like no. 2. The loan is rarely free.
That is correct. The CEO will sell enough stock to pay the loans but that still reduces the taxable income dramatically, while allowing the wealth to grow.
I’ve wondered about this, just skipping around to different banks, borrowing new money to pay old loans. Like a pyramid scheme kind of. I guess just like mortgages for less rich people, keep refinancing, never pay it off.
True, but there's an upper limit to a company you own being a piggy-bank for the owner. Eventually you'd need to bring in other investors, or go public, and at that point the tax would kick in.
Would it make it difficult to sell stock to raise capital? Probably, but it would tamp down IPO crazy, the immediate-ROI madness that drives predatory capitalism, etc.
I worry it would tilt the market to established players, but on the other hand, it would prevent serial entrepreneur pump-and-dump
Any use of unrealized wealth to generate realized gains over $X shall be a taxable event treated as regular earnings which may be deducted from the taxes on the sale of said wealth if and when it is executed."
Do you have examples of the more?
Would it just be in the area of real income from unrealised gains, or in other areas where wealth accumulates without accruing tax burden?
I'm gonna guess floating a wealth tax, which would never (and maybe shouldn't ever) fly. But scaling that back to taxing using unrealized wealth as collateral could be the "compromise" point.
Nah, any excuse for why we shouldn't tax the wealthiest people on the planet is a bad excuse. Small changes are cumulative. We should treat freedom from oligarch oppression like a job not a lottery.
But you're here arguing that we should take an ask off the list. People who ask for many things get some things, but people who ask for everything always get nothing.
Actually it isn't an easy loophole to close. There are many good reasons for having these rules in place for everyone. If you have enough money though, you can use it to full advantage. Closing it though will have many unintended consequences.
I just meant that it wouldn't require tons of systemic changes to hope we get new results. Politically it's impossible because Liberal "democracy" is just dictatorship of the rich but by like nuts and bolts law it would be straightforward to address.
Re: no tax. We tax capital gains when they are "realized" because the value of a stock as it goes up is speculative, but when you sell it it becomes concrete. If we classified use as loan collateral as a "realization" even "Buy, Borrow, Die" would disappear.
Some respondents are complaining the bank loan will come due eventually but it's likely the loan is a scam. The bank, likely one of those "rich people only" banks like the one Nigel Farage was crying about being kicked out of, makes these "loans" with no intention of getting paid back.
Some people are complaining these examples are incorrect but really they are just a bit simplistic. Probably the CEO is actually the owner of a corporation and they use the corps money, possibly loaned, as their personal income. Corp owns houses, cars, planes and employs a legion of servants.
Don't they have to pay back the loan with interest? Where does the money come from for that? Eventually you have to pay back the loan from either income or sales of stock which is taxable
The interest is rock bottom because of the collateral. They can make minimum payments on it basically indefinitely until they die, when it is transported to the magical realm of someone else's problem.
Succinct and to the point! This is the game the 1% play in this country ! The reason why are infrastructure is shit, why are healthcare sucks compared to other developed countries!
The federal current top capital gains rate is 20% so the recipient has $800,000 that is kept, an improvement of $200,000. Once the net worth gets high enough, it is not even necessary to take out a loan, just put the stock into types of funds or trusts and never pay interest, gains, or income.
As always, it depends on the amount. 1% of a billion dollar loan is 10 million. The corporate tax rate of 24% would net the IRS 2.1 million on that transaction.
There also a bunch of risk in any sort of compensation associated with stock that should be considered. If the street price of the stock dips below the strike price of your options, for example, you either buy them at a loss or let the options expire.
Debts income for the poor. Several times they garnished my wage and I still had to pay taxes on that incomeevrn though I never got it. It's taken from your check by your employer for debt!🤷
You still need to maintain a certain percentage of equity or a margin call will come.
Also will have to make payments+ interest to get the collateral (stocks) back.
Not so sure this is for the under 1 milly crowd.
Borrowed money they have to pay interest? It’s not free money!
However if it’s borrowed stock (like Robinhood has an option), in large quantities that will still be some form of income?
Mandatory wealth tax on unrealized gains at year end would have helped (forced realization at year end for anyone
Stock grants are treated as income in America as well. For example if you were given $100,000 in stock and sold it for $120,000 the $100,000 would be subject to income tax in the year that it vests and the $20,000 would be subject to capital gains tax in the year you sell it.
Using loans to avoid capital gains taxes is a viable and common option for ultra wealthy people in America though. Jeff Bezos doesn't need to sell $100 million worth of stock and pay a 15% tax on it. He can take an $85 million loan and pay super low interest instead.
I think what's missing is that when company gives CEO 1 million stock, they do pay tax on that 1 million stock and get to keep only after stock after tax. Once they sell those after-tax stocks, they pay capital gain tax on profits of after-tax stock.
Comments
Am I missing something?
He still has all his stocks, but he can never sell them and spend the earnings without getting hit with the capital gains tax.
I said that sounded like a good problem that only a rich person could have.
He smiled uncomfortably and changed the subject.
"Note Receivable - Shareholder"
Those shares get sold. The taxes get paid. The interest gets paid.
This isn't a loophole at all. It's just a very risky delay.
What happens when the shares go down and the bank liquidates your position? And now you also owe the IRS
This is why many people confuse the fact that they 'figured out a way to avoid taxes' with 'they haven't been caught, but it's actually illegal.'
I sold a private business in exchange for publicly traded company stock. Very common.
My broker (etrade in this case) was notified and the shares were registered to my name. But the broker does not have cost-basis data because they don't know what it cost me to build my business.
The super-rich don't play these games.
They end up owning little and making nothing. Their off-shore businesses do everything and fund their lifestyle.
https://www.icij.org/investigations/panama-papers/
He doesn't take a salary & is paid in stock options. He pays taxes ONLY when he exercises options
In 2021 Elon used $142.6 M from stock he sold to exercise shares worth $23.6 Billion giving him $23.5 billion in taxable income for 2021 ONLY
The idea was to encourage people to focus on long term investments. The reality is we reward people for already being rich and it’s hard to catch up with labor.
The less you have, the more you borrow, the greater the punishment for doing so
Charging income tax on borrowed money seems like a bad idea.
It'd also incent people to hold stock, not trade it, and earn dividends, which encourages longer-term planning on the part of the corporations.
Banning buybacks wouldn't hurt, either.
I worry it would tilt the market to established players, but on the other hand, it would prevent serial entrepreneur pump-and-dump
Ask for everything
Get something
Ask for something
Get nothing
Would it just be in the area of real income from unrealised gains, or in other areas where wealth accumulates without accruing tax burden?
Ask for everything, get something
I said it wasn't enough.
You need to ask for more.
Study Trumps tax returns. Many embedded tax dodging schemes
Either party could change tax laws, but neither want to. They're all rich and beholden to the rich.
Thankfully the media is all over it
If stocks are awarded as grants, then they are taxed as income on top of the cap gains when they are sold.
If they are awarded as options then they need to purchase those options before they are able to sell them and pocket the difference (minus cap gains).
Since the person is getting a loan then the tax burden is on the bank’s gains as they are paid back the loan.
Also will have to make payments+ interest to get the collateral (stocks) back.
Not so sure this is for the under 1 milly crowd.
However if it’s borrowed stock (like Robinhood has an option), in large quantities that will still be some form of income?
Mandatory wealth tax on unrealized gains at year end would have helped (forced realization at year end for anyone