Because they borrow well below. Your stock is worth 5 billion and you use it as collateral to have a LOC of say 100 million to pay living expenses. Not the other way around.
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Not currently. I'm simply not sure why it's permitted. Borrowing against physical assets like a home or car makes perfect sense. It's the only way most people could ever get access to a home or transportation.
Borrowing against the unrealized gains of equities only serves the purpose of allowing already wealthy people to leverage their assets to create more wealth for themselves, and the side effect is to avoid paying taxes.
Some people like Liz Warren want to short circuit this by charging a wealth tax on unrealized gains. That would be exceedingly difficult to implement. Where does it kick in? Would you want you savings account taxed? It seems like a simpler solution would be to just prohibit this sort of borrowing.
At what level does it kick in? Does everyone's 401k get taxed or just those with 5M? Do we send inspectors into every home suspected of having a valuable portrait or collector car? What happens if we tax someone's 401k at 1M and a month later the market crashes?
They are borrowing against the current listed value of the stock at the time they borrow, under the logic that if they need to pay the debt instantly, they can sell and make the lender whole.
In any wealthy person's portfolio there are enormous unrealized gains, very possibly mostly unrealized gains if they bought very low, held long term, or worse, were gifted them as a corporate executive benefit.
I find it decidedly weird that wealthy people are able to fully avoid taxation. Most of us need to sell equities in retirement, and we either pay cap gains or income tax in the case of 401ks. If I have to choose between weird and inequitable, it's going to be weird.
Yes which is why we regulate margin percentages. It was further tightened after '09. We should probably be tightening farther to avoid the income tax exploits.
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🤔 Think orange 🍊 Julius used that phrase!
If the stock value went up by $1M, you pay tax on that $1M.
In no way is that complex.
This can be determined at the end of the fiscal year, just like we determine annual income.
People pretend this is complex to try and use it as an argument against it. It's not a good argument.
They are borrowing against the current listed value of the stock at the time they borrow, under the logic that if they need to pay the debt instantly, they can sell and make the lender whole.
The capital gains tax isn't the lender's problem.
Treating them as distinct would be weird.