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The richest people borrow against their stock (2021)

forbes.com

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Re: The richest people borrow against their stock (2021)

#11

Post by creato »

1123581321 wrote: post #8
bdangubic wrote: post #7

Earlier quoted context omitted.

> If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth. This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borr…

That does not track for me. If someone has $20k in Schwab and chooses to use their credit card instead of selling stock and paying cash, I don't think they should have to pay taxes on that or suffer a criminal penalty. Same for taking on a car loan or a mortgage.

If that's what was happening you'd be right but it isn't. Credit cards have high rates and low limits for a reason: they are unsecured credit. Loans with collateral are secured by the collateral, and it makes some sense that should be considered a realized gain for that collateral (or loss for that matter).

Re: The richest people borrow against their stock (2021)

#13

Post by [deleted] »

creato wrote: post #11
1123581321 wrote: post #8

Earlier quoted context omitted.

That does not track for me. If someone has $20k in Schwab and chooses to use their credit card instead of selling stock and paying cash, I don't think they should have to pay taxes on that or suffer a criminal penalty. Same for taking on a car loan or a mortgage.

If that's what was happening you'd be right but it isn't. Credit cards have high rates and low limits for a reason: they are unsecured credit. Loans with collateral are secured by the collateral, and it makes some sense that should be considered a realized gain for that collateral (or loss for that matter).

[deleted]

Re: The richest people borrow against their stock (2021)

#14

Post by bdangubic »

JumpCrisscross wrote: post #9
bdangubic wrote: post #7

Earlier quoted context omitted.

> If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth. This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borr…

> as soon as you try to use it as realized in ANY way you should be taxed immediately You're trying to define a rule based on intent. That's doable. We do it all the time. But it tends to get messy, fast. How do you differentiate investment leverage from realizing gains through borrowing? If you track distributions, does a commensurate reduction in contributions count? What if the borrowing is done against the portfo…

It is not messy at all if you use KISS. You do not differentiate ever - ANY usage of unrealized gains makes them realized. Very simple to implement but of course won't ever happen :)

Re: The richest people borrow against their stock (2021)

#15

Post by pwg »

bdangubic wrote: post #5
rufus_foreman wrote: post #4

Spoiler: the same way you can access your home equity without selling your house.

With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it and you are paying HEFTY property taxes on your current home worth each and every year. Very poor analogy...

> do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now)

Absent a few exceptions, at least in the US you very much do have to pay capitol gains on the increase in value of your house when you sell it. And those exceptions typically amount to a deferral of the tax rather than a "tax free" gain.

The one sure way to not pay capital gains on one's house is to hold it until you die, and then your heirs get the 'step-up' basis and they don't have to pay tax on your gains, but will have to pay tax on the gain they accrue while they hold it.

Re: The richest people borrow against their stock (2021)

#16

Post by gruez »

bdangubic wrote: post #5
rufus_foreman wrote: post #4

Spoiler: the same way you can access your home equity without selling your house.

With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it and you are paying HEFTY property taxes on your current home worth each and every year. Very poor analogy...

>With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it

...only up to 250k if you're in the US.

https://www.irs.gov/taxtopics/tc701

Re: The richest people borrow against their stock (2021)

#17

Post by JumpCrisscross »

bdangubic wrote: post #14
JumpCrisscross wrote: post #9

Earlier quoted context omitted.

> as soon as you try to use it as realized in ANY way you should be taxed immediately You're trying to define a rule based on intent. That's doable. We do it all the time. But it tends to get messy, fast. How do you differentiate investment leverage from realizing gains through borrowing? If you track distributions, does a commensurate reduction in contributions count? What if the borrowing is done against the portfo…

It is not messy at all if you use KISS. You do not differentiate ever - ANY usage of unrealized gains makes them realized. Very simple to implement but of course won't ever happen :)

> ANY usage of unrealized gains makes them realized

What does "usage" mean? If you write a covered call, did you "use" the asset? If your broker lends your shares out, are they being used? What about presenting your brokerage statement as proof of assets to a mortgage banker? What about--I've done this--showing your brokerage statements to American Express to get a better rate?

I'm still only talking about publicly-traded common stock, mind you.

> simple to implement but of course won't ever happen

Possible, but stupid. You'd raise taxes on the middle class who can't afford advice (or personal attention from lenders) while doing little to those who can dance in the ambiguity offered by what seems simple from a distance but is devilishly complex up close. Because at the end of the day, what you're trying to differentiate is intent. And intent is easy to hide and expensive to uncover.

The core problem in this scheme isn't so much the deferred taxes as much as the eliminated ones: capping the step-up basis to e.g. $10mm, the EPA's statistical value of a human life, would do the trick. Unlike ascertaining "usage," whether or not someone has died is generally simple to determine.

Re: The richest people borrow against their stock (2021)

#18

Post by gruez »

bdangubic wrote: post #7
doe_eyes wrote: post #2

By borrowing against their holdings. The framing is deceptive. You can do this too: there is no requirement to have billions in collateral. If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth. The gotcha is market risk. If there's another crash akin to the housing crisis - and there will be - the bank will liquidate your ho…

> If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth. This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borr…

>This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."

Do you think the same should apply to HELOC loans? It's basically the same thing but with your home rather than stocks.

Re: The richest people borrow against their stock (2021)

#19

Post by bdangubic »

JumpCrisscross wrote: post #10
bdangubic wrote: post #5

Earlier quoted context omitted.

With just a "slight" difference in that you do not have pay taxes on the gains you made on your house (what you paid vs. what it is worth now) when you sell it and you are paying HEFTY property taxes on your current home worth each and every year. Very poor analogy...

> and you are paying HEFTY property taxes on your current home worth each and every year Is there any jurisdiction where the assessed value of a home is anywhere close to its market value? (You're still correct. But OP's observation, that this is the stock equivalent of a reverse mortgage, is moreso.)

I have a rental condo in DC and a house in Northern VA, both are assessed within 10% of what the current market value, DC condo slightly over-assessed, house in Northern VA slightly under-assessed

Re: The richest people borrow against their stock (2021)

#20

Post by s0rce »

doe_eyes wrote: post #2

By borrowing against their holdings. The framing is deceptive. You can do this too: there is no requirement to have billions in collateral. If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth. The gotcha is market risk. If there's another crash akin to the housing crisis - and there will be - the bank will liquidate your ho…

I used this when Chase closed my bank account because of a typo. Just borrowed cash from Fidelity to float for a month until everything got sorted.
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