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The richest people borrow against their stock (2021)

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

#171

Post by eadmund »

lifeisstillgood wrote: post #141

Which in my opinion is a transaction freely entered into by both parties, and is a taxable event. You have gained income from your capital at this point. Wealth taxes do not need to have someone guess a value of someone’s wealth. The wealthy can tell the government what they think it is at each point.

> You have gained income from your capital at this point.

No, one has moved money from a debt account into a cash account. For every dollar the cash account increases, the debt account decreases. Income, on the other hand, is final and not paid back.

Imagine that I am born with $100,000 in stock:

    Assets
      Stocks
        XYZ  100 shares @ $1,000/share = $100,000
      Bank account                             $0
    Liabilities                                $0
    Income                                     $0
    Expenses                                   $0
    Equity                              -$100,000
My net worth is $100,000.

If I borrow $50,000 against my stock, here are my accounts:

    Assets
      Stocks
        XYZ  100 shares @ $1,000/share = $100,000
      Bank account                        $50,000
    Liabilities
      Loan                               -$50,000
    Income                                     $0
    Expenses                                   $0
    Equity                              -$100,000
As you can see, my net worth is still $100,000. I have $50,000 more in cash, but $50,000 less in loan.

On the other hand, if worked a job instead and didn’t take out a loan, this might be the situation:

    Assets
      Stocks
        XYZ  100 shares @ $1,000/share = $100,000
      Bank account                        $50,000
    Liabilities                                $0
    Income                                $50,000
    Expenses                                   $0
    Equity                              -$150,000
My net worth is now $150,000. I actually had income. Same $50,000 in my bank account, but now it’s income and my net worth has increased.

What if I worked the job and took out the loan? Then it would look like this:

    Assets
      Stocks
        XYZ  100 shares @ $1,000/share = $100,000
      Bank account                       $100,000
    Liabilities
      Loan                               -$50,000
    Income                                $50,000
    Expenses                                   $0
    Equity                              -$150,000
I borrowed $50,000 and worked for $50,000, and so my bank account went up $100,000, but my net worth didn’t go up $100,000 — because I owe $50,000, too.

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

#172

Post by ThinkBeat »

Shaanie wrote: post #145
theshrike79 wrote: post #142

Earlier quoted context omitted.

You can also buy art. 1) buy a painting for X 2) have it evaluated, sometimes the price is higher than X 3) put it in storage or a tax loophole between countries 4) use said painting as collateral for low interest loans Now you have money to invest, as long as you make more than the low interest loan, you're making profit.

But then you have X money tied up in some presumably illiquid art with questionable value. Seems better to just invest the X money from the start.

but then you do not get the tax benefits discussed above.

The market for "investment art" I huge and everyone involved has an upside by art appreciating in value.

> The artist may get more money (since the artist only gets paid in the initial transaction the artist may only get a fraction of the value as it increases. The artist may find that later work will become more valuable as other investors want more of his art.

>The gallery gets more money, and it may attract more art investors

> and the auction house gets more money if it ends up there.

How much art is worth is difficult to estimate on its own. I mean a white canvas painted uniformly white is worh a lot of money if a famous artist does it.

It is worth entirely nothing if I do it.

I expect then that the market decides the value. All investors want art to get more valuable and are in on it.

As an art lover, this is such a tragic scheme. Unknown amount of art that will never been seen by the public. Locked up inside a storage facility in a big box Often the investor has no interest in the art at all, just an investment made by some form of a broker.

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

#173

Post by spacebanana7 »

lifeisstillgood wrote: post #141

Which in my opinion is a transaction freely entered into by both parties, and is a taxable event. You have gained income from your capital at this point. Wealth taxes do not need to have someone guess a value of someone’s wealth. The wealthy can tell the government what they think it is at each point.

> The wealthy can tell the government what they think it is at each point.

This will need to be audited by the government, at least occasionally. With all the issues that come from estimating the value of a domain names and other unusual assets someone holds.

I think restricting the tax deductibility of charitable donations is a better way to start. These transactions are already usually included in tax filings.

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

#174

Post by cko »

attentive wrote: post #153
cryptonector wrote: post #77

Earlier quoted context omitted.

> But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income? No, you just borrow against yet more stock. You need never sell any, much less pay yourself any significant income, provided you have enough stock. Since you don't sell the stock, you need not pay capital gains taxes. Since you have no real taxable income, you need not pay much in income taxes either.

Pay taxes once vs pay interest forever? At what point it'll break even and go negative?

Let's say every year your portfolio goes up 10%. Every year you borrow 3%. You never pay down the principal, and I think you can just let the interest payment get added to the principal. Also, the interest is tax-deductible.

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

#175

Post by bruce511 »

chgs wrote: post #170
bruce511 wrote: post #116

Earlier quoted context omitted.

The reverse approach has issues as well, primarily for assets that aren't easily divisible. The obvious example is family farms, or indeed the family house. Capital taxing the asset on death means a (potentially large) tax bill happens in many cases this can't be paid without selling the asset. If the sale was to another family looking for a farm, then that could be argued is neutral. But it won't be. It'll be sold t…

> in many cases this can't be paid without selling the asset. Ok. And? Why should someone get $5m for doing bugger all. If they were paid $5m for cleaning a car they would lose a fortune in tax.

They're not getting 5m, that's the point. They're inheriting an asset which may be valued at 5m. Like a farm, or a house, or a painting or whatever.

Forcing the sale of family property or assets does not serve any good in the long term.

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

#176

Post by KingOfCoders »

roenxi wrote: post #152
eadmund wrote: post #135

Earlier quoted context omitted.

The issue is the step-up in basis, not borrowing against assets. The step-up in basis really is a giveaway. I think that it would make a ton of sense to transfer the basis rather than step it up.

Or the issue is the money printing that tends to be going on. This strategy should be too risky to work. They'd be losing interest on the money each month and they'd go bankrupt in the long term due to eventually borrowing money into a market downturn. If interest rates are too low though then they wouldn't pay interest each month and the market will keep inflating - so the strategy will work. Basically, this looks l…

One of the best things when you are rich, you can buy when everyone wants to sell, and sell when everyone wants to buy.

At one level of money you are not impacted by a market downturn or crisis.

Many very rich people in Germany became very rich during or after WW2 - but they already were rich. Normal people just get poor in a crisis or market downturn.

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

#177

Post by tomatocracy »

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…

For very large stakes, the terms tend to be much more bespoke though - an automatic sale of collateral amounting to a large % stake is probably not in either borrower or lender's interest.

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

#178

Post by tomatocracy »

throwaway2037 wrote: post #127
beezle wrote: post #48

Earlier quoted context omitted.

Keep in mind that the bench mark rate is almost always something akin to bills so is a very short time horizon. That may be great or not so great compared to what rate you might get on say a 5/10/15 yr collaterlized loan. ref: https://www.interactivebrokers.com/en/trading/margin-rates.p...

Nice link. Thank you to share. This notice bothers me a bit: > IBKR will assess a surcharge of 1% on large loan balances unless otherwise prearranged with IBKR. The 1% surcharge would apply to all balances in the highest tier. I wonder what exactly "prearranged with IBKR" means. Call them up... "I need to borrow 50M USD, and pledge my Meta stock." Them: "Hang on. Yeah, sure." My guess, if the loan is large enough, th…

I think it's probably more about hedge funds etc where they will negotiate bespoke terms/pricing across the board (including assessing risk which at that level might partly be based on track record, identity of the underlying investors, strategy etc).

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

#179

Post by WA »

refurb wrote: post #159
cryptonector wrote: post #76

Duh. They need never pay income nor capital gains taxes, as long as their stock valuations keep going up, or as long as they retain enough stock, either way they can always borrow against more stock to service the loans that they took out against their stock, never ever selling any stock nor taking anything more than nominal income.

Bezos has paid $1.5B and Musk over $12B in taxes according to Google.

Please stop counting taxes of super-rich in absolute terms. It simply doesn't matter. We need percentage-based taxes to get the real picture. Because those numbers seems a rounding error given their wealth.

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

#180

Post by scotty79 »

nobodywillobsrv wrote: post #168
Shaanie wrote: post #149

Earlier quoted context omitted.

If I buy something for $10 and it's worth $10,000 when you inherit it, you should (obviously?) be taxed on the increase in value from $10 -> $10,000 if/when you sell. The purchase price shouldn't be "reset" to $10k. It'sutterly insane to me that the step-up basis exists in the US, it's such an obvious loophole that can fairly easily be closed without many adverse effects. In my country (Sweden) if you don't know the…

Why should you be taxed on it at all?tax is policy. You tax things you want people to consume less of. Inflation makes nominal values to up. More inflation more capital gains. Gov is now incengltivized to inflate to pull tax out of realized assets that have not even gained real value

What you tax is not really relevant as long as it doesn't disrupt some activity you want to continue happening. If it was up to me I'd tax spending not income. Regardless of what you are spending on. Bread? Sure! Employee? Yes! 10% of Tesla? Same!
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