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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)

#221

Post by Dracophoenix »

KingOfCoders wrote: post #176
roenxi wrote: post #152

Earlier quoted context omitted.

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.

You don't need to be rich to do that, just wise enough to keep savings and live below your means.

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

#222

Post by gpderetta »

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).

It gets more complicated. If you remortgage an house, should you pay CGT on any unrealized increase in value?

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

#223

Post by gpderetta »

eadmund wrote: post #167
bdangubic wrote: post #36

Earlier quoted context omitted.

How is it not realized? When I can use it as "realized" to borrow against it? When it comes to paying taxes I go "sorry Uncle Sam, this is fictitious, I don't really have this" but then I head over to the bank and go "look at my brokerage accounts, I have ALL THIS MONEY, lemme borrow against this now all-of-sudden realized money..."

> How is it not realized? Because of the definition of what realized income is. Borrowing is not income. You mention below that you own a Washingtonian condo and a Virginian home. Let’s imagine that they are both $100,000 and that you have no other money or debts. Your net worth is thus $200,000. You go to your bank and say ‘I would like to borrow against the value of my assets please,’ and they say, ‘certainly, here…

Well, taxing borrowing as income is not what is being discussed here though.

It would be workable to make borrowing against an asset at a certain value equivalent to crystallizing any gain on that asset, pro-rated on the amount borrowed: you own a 2M house, that you paid 1M. You borrow 500k against it, it would be as if you sold 1/4th of it and you would pay CGT immediately on the 1/4th of (2M-1M); the basis would be adjusted so that when eventually you sell the house you pay CGT only on the yet-unrealized gain.

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

#224

Post by commandlinefan »

vel0city wrote: post #213
mackman wrote: post #189

Earlier quoted context omitted.

If you exceed the inheritance tax exemption then you are taxed on the $10k so LTCG would be double taxing. You could argue that the inheritance tax should have a much lower exemption but double taxation is harder to justify.

> double taxation is harder to justify Bullshit. "Double taxation" is such a weak argument to me. When I buy gas at the pump it's taxed multiple times. State sales tax. City sales tax. Federal gas taxes. State gas taxes. Quadruple tax on me there. My wage income has several taxes. FICA taxes. Payroll taxes. Federal income taxes. Potentially state income taxes. Potentially city income taxes. When I pay for a hotel the…

> Quadruple tax on me there.

We have a problem with that, too.

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

#225

Post by mschuster91 »

mcculley wrote: post #206
mschuster91 wrote: post #191

Earlier quoted context omitted.

> The same law is the one that lets the surviving spouse or children to continue to live in a home rather than be forced to sell due to a sudden realized capital gain. You can argue that you don’t care about keeping multi millionaires in their childhood homes after their parents die, but it’s hardly “obvious” that it should be taxed. Well, "homestead" exemptions are usually already a thing in most countries' inherita…

Most parents don’t want meritocracy. They want their children to have an advantage over the children of others. They just have not squared this instinct with political ideology.

> Most parents don’t want meritocracy. They want their children to have an advantage over the children of others.

Thing is, "meritocracy" doesn't exist on its own either. Even if a poor person's child is among the more intellectually gifted in school, it's hard to compete against the children of those who are blessed in money. And that extends to adult life as well: those born to academic parents are much more likely to go into higher education themselves and have an easier time there (both due to connections as well as the simple opportunity of having parents to ask how to best format a paper or to proofread one), those born to rich parents can simply afford to "try themselves out" - for someone with millions to burn, they can easily afford to seed-fund whatever scheme their kid comes up while most other potential founders depend on sheer luck meeting someone in a random elevator.

And the importance of children being "advantaged" ruthlessly is a recent trend too. Up until 30, 40 years ago, most kids worked in farms or the trades and they were happy with it. But ever since employers demanded higher education and everything else became decried as "something for immigrants" aka low economic lifetime perspective, that shifted... funny, cities would drown in garbage in a matter of weeks when there would be no garbage haulers, but they would continue to be livable if Wall Street went up in flames.

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

#226

Post by from-nibly »

Dracophoenix wrote: post #221
KingOfCoders wrote: post #176

Earlier quoted context omitted.

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.

You don't need to be rich to do that, just wise enough to keep savings and live below your means.

No you need to be really long term liquid and thats what poor people really don't have ( liquid assets to throw at buying stock)

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

#227

Post by qeternity »

altacc wrote: post #154
qeternity wrote: post #139

Wealthy people of course do all sorts of financial optimization. The framing of this as being primarily a way to avoid CGT is imho just uninformed populist rhetoric. The main reason this is done is for leverage e.g. Elon wants to buy Twitter but he does not want to reduce his stake in Tesla (ignoring whether he could actually liquidate that much TSLA stock in the first place).

I'd disagree as due to the incredibly low amount of tax paid by the ultra wealthy it looks like CGT avoidance and Buy Borrow Die is a primary use case for borrowing against assets.

You still have to pay interest. At 5% interest rates compounded after 4 years it’s cheaper to just pay CGT.

The wealthy pay the vast majority of taxes. You might not think it’s enough, but let’s be realistic here. The biggest government expenditures don’t scale with someone’s wealth. So wealthy people aren’t consuming more government services yet they pay a much larger absolute sum.

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

#228

Post by vel0city »

commandlinefan wrote: post #224
vel0city wrote: post #213

Earlier quoted context omitted.

> double taxation is harder to justify Bullshit. "Double taxation" is such a weak argument to me. When I buy gas at the pump it's taxed multiple times. State sales tax. City sales tax. Federal gas taxes. State gas taxes. Quadruple tax on me there. My wage income has several taxes. FICA taxes. Payroll taxes. Federal income taxes. Potentially state income taxes. Potentially city income taxes. When I pay for a hotel the…

> Quadruple tax on me there. We have a problem with that, too.

But like, why? It's a worthless point. If there were five taxes of one percent each versus one tax of 20% how is the one tax somehow better? Which one would you choose, getting taxed five times or once?

It doesn't really matter that there's a FICA and an income tax and a payroll tax in the end, what really matters is the overall tax rate and if that's fair given some moral decision of fairness of sharing costs of society.

If a city chooses to levy sales taxes and hotel taxes to capture more revenue from visitors because their town is a tourist destination and want to collect from tourists more than locals that's fine. I won't weep a tear for those getting "double taxed" on their vacations.

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

#229

Post by Apreche »

dullcrisp wrote: post #99
Apreche wrote: post #92

Earlier quoted context omitted.

There is another difference that is related to risk. Larger loans allow access to lower risk opportunities. If I had many millions in stocks, and I was greedy for more, I would borrow against it to develop residential real estate in a high rent neighborhood. Yes, there's some risk, but it's as close as you can get to buying a money fountain. I'd be very confident that the rents from the building would pay back the mo…

Wanna go halfsies on some residential real estate in a high rent neighborhood?

Sure, but we'll have to go thousandsies, or at least hundredsies.

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

#230

Post by Apreche »

tightbookkeeper wrote: post #100
Apreche wrote: post #92

Earlier quoted context omitted.

There is another difference that is related to risk. Larger loans allow access to lower risk opportunities. If I had many millions in stocks, and I was greedy for more, I would borrow against it to develop residential real estate in a high rent neighborhood. Yes, there's some risk, but it's as close as you can get to buying a money fountain. I'd be very confident that the rents from the building would pay back the mo…

Rich people having more options, and being more insulated from risk, is not news.

It's not news to the world, but it's news to many.
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