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> Capital Gain taxes are delayed until you actually sell the stock. > Squabbling over a wealth tax is not useful. I agree that a wealth tax is not the way to g

by drdec 5y ago

> Capital Gain taxes are delayed until you actually sell the stock. > Squabbling over a wealth tax is not useful. I agree that a wealth tax is not the way to go. But there are other ways to skin this cat. The big takeaway I got from the article missing in your summary is that the wealthy take loans secured by unrealized gains in order to finance their lifestyle. So what if we found a way to make a rule that using unrealized gains as collateral for a loan was, for tax purposes, the same as realizing the gains? (You might need to tweak the rule for fairness but the basic point remains.) I think aggressively closing loopholes in the current code could go a long way (you mentioned a couple, like charitable donations and tax havens).

TimPC 5y ago
Capital gains being delayed is not a direction we want to pursue. There are huge problems with unsellable stock in venture-backed start-ups and other situations where you can end up owning a massively valued asset that you can't sell to pay the taxes on. Said asset could go to zero without you ever realizing money. I don't think people should lose their start-up stock over taxes, or face putting their entire wealth on the line on a gamble the company pays off. Keep in mind it's not unheard of to have stock worth $2+ million for an early employee in a company that goes to zero. Even more relatable to the average person: If your house price goes up too quickly you can be forced to sell to afford paying the capital gains on it.
- rhino369 5y ago
  No different than me selling stock A, paying capital gains and then buying stock B, which could go to zero. You can handle your hypo the same way the tax system handles mine. You can deduct the capital loss from future gains.
  - nilsbunger 5y ago
    Sure it’s different. You might not have cash to pay those taxes. When you sold and bought, you had an opportunity to set aside the $$ to pay taxes
    - rhino369 5y ago
      If you are borrowing money, you have the opportunity to set that money aside to pay taxes. It's really no different.
      - nilsbunger 5y ago
        It's not easy to get a loan against illiquid assets in many cases. And even if you get a loan, if the asset goes to zero you still owe the loan balance, which could be huge compared to your normal finances. And you pay interest on that loan. It could work in some cases but I don't see how it's the same as selling stock A and buying stock B.
  - PaulDavisThe1st 5y ago
    You may never have future gains to match the loss. Why would we want a system that taxes people on an unrealized gain and then (maybe) gives it back to them over coming years?
    - deleted 5y ago
      [deleted]
    - sangnoir 5y ago
      > You may never have future gains to match the loss. C'est la vie. That's how Capital Loss deductions, Electric Vehicle credits and other non-refundable tax credits currently work: individuals may not have enough upside to maximize their benefits, That's just how the system works as it is impossible to balance everyone's competing scenarios. If you are eligible for a $7500 EV credit but only paid $3000 in taxes, you'll only get that $3000 back, and not the full $7500.
    - pnutjam 5y ago
      Most American's live in that system, it's called being an employee...
    - munk-a 5y ago
      I think we'd want that tax income because a dollar today is more valuable than a dollar tomorrow - making sure we increase cash flow in the short term and stabilize expected cash flow allows us to more accurately set the budget.
- mcguire 5y ago
  Or, perhaps, stop accepting payment that may be valueless when you try to access it. And stop trying to get paid in a way that hides your income from the tax system.
- unclewalter 5y ago
  To me, the parent wasn’t saying an asset holder would need to pay taxes on the asset unless they used it as collateral. To me, this makes a lot of sense. If someone owns a startup and worries tax implications would overextend them if the value was taxed, they shouldn’t use it as collateral on a loan. I may be missing your point though.
  - yebyen 5y ago
    But you basically always do use your house as collateral on the mortgage loan. I think this is a more radical change than you have realized.
    - saalweachter 5y ago
      You could pin it to when loans are issued rather than their existence. That would only affect home refinancing, which will still be a considerable number of people.
    - lupire 5y ago
      That's different, because the house is collateral for itself, effectively a "rent to own", not for money that can be spent elsewhere.
  - nmfisher 5y ago
    I agree, I don’t see why income tax couldn’t be levied on any amount greater than $X borrowed/secured by an asset as collateral. For all intents and purposes, it is income and should be taxed as such.
  - koheripbal 5y ago
    I don't see why we care that they're using an asset as collateral for a loan. They still need to pay back that loan with post-tax money. Maybe they're kicking the can down the road, but that's their choice. The real issue here is that super rich are, at the end of that road, donating shares to their non-profits, tax free. ...and that their children then have access to that non-profit and all of its assets, again without income or estate tax. The big hole here isn't the unrealized gains - it's the "charitable Foundations" that are a complete scam.
- jbay808 5y ago
  I'd be happy if I could give a percentage of the shares themselves to the government as a tax payment (paying tax on the shares specifically), so I don't have to worry about the risk that they're overvalued by the tax agency.
  - IncRnd 5y ago
    No, you wouldn't. Unrealized gains being taxed would eventually make you declare bankruptcy or live on the street. The government wouldn't let you pay in stock but sell stock yourself.
  - UnpossibleJim 5y ago
    So, unless I miss what you're saying, is that you propose that the government own a share in every business that is created by way of "taxation". Is that not what you're proposing in this statement? Do they also get to leverage these shares to have a vote as to the business decisions, like any other share holder does? (assuming they have enough shares in this hypothetical share tax)
    - ljf 5y ago
      Not my idea, nor one I think is perfect, but I assume they are saying this would no be every company, just those where they would rather give shares than pay tax. No doubt they would be loads of ways to scam this though, setting up supposedly valuable companies to 'pay' a big tax bill, then rinse the company or allow it to fail while diverting profit elsewhere.
      - UnpossibleJim 5y ago
        I was just saying, it sounds an awful lot like forced communism through taxation. A share in a company is a portion and a vote in a company, however small.
      - jbay808 5y ago
        I can't think of a way to scam it, as long as they only allow this method of payment for taxes assessed on the asset itself, rather than as a substitute method of payment for other taxes owed. It would be an interesting idea to explore and could potentially be a massive boon to risky startups by allowing them to hand out equity more freely as incentives without worrying about the accompanying tax burden.
- _archon_ 5y ago
  In your house example. this is only if the homeowner takes out a loan against the new increased value of the house, and then pays tax on a portion of that loan. If your house appreciates and you don't play financial games with it, the only increase in costs would come from a local tax reassessment.
  - taeric 5y ago
    I think it is assumed a wealth tax would not require taking out a loan. You can assume that your home would be exempt, but more likely it will just be a standard allowance deductable. This isn't a new thing. Property taxes are the wealth tax that already exists, at large. That is... You're point on a tax reassessment is exactly what is being discussed. And if the tax on your wealth is increased as a form of capital wealth, expect the rates to be higher that most property taxes. Edit: I see I missed that this was a hypothetical on touching collateral. Not sure how I feel on that one. In large because I know so many folks are essentially tricked by marketing to refinance all the time.
  - booblik 5y ago
    So if you decide to refinance your mortgage that would subject you to a tax? What is wrong with just paying increased property taxes?
- jmcqk6 5y ago
  >a massively valued asset that you can't sell In this case, the value is not well defined. If you don't have a market, you cannot determine the value. You may think it's extremely valuable, but if you have no one else willing to recognize that value, then it doesn't really exist.
  - tyre 5y ago
    The value is precisely defined by a 409a valuation. That's the price options are offered at (the strike price) and what the FMV is.
    - 6gvONxR4sf7o 5y ago
      Aren’t 409a valuations famously gamed?
    - ardit33 5y ago
      It is a bogus valuation... as it is not market based. If you can't sell the stock, and nobody wants to buy it, (yes, there are startups that are in this position), then that valuation is mostly wishful thinking. Often the valuation undervalues the company as well, but that's another story.
    - lupire 5y ago
      That's the value when the valuation happens, which can be years before exercise.
- HWR_14 5y ago
  A house's capital gains actually have special treatment. But in some states property values for taxes do rise by huge amounts.
enriquto 5y ago
> I agree that a wealth tax is not the way to go. Why not? A tax on wealth, even a small one, is the only mechanism to avoid a long-term drift towards a feudal-like state of society.
- Spooky23 5y ago
  Exactly. The strategic problem here is that the changes that took place in the Vietnam era and 80s ultimately creates a concentration of capital and power that is beyond anything we’ve seen since Roman times. In the mid-term we’re looking at some sort of weird hybrid plutocrat/government hybrid with an American flavor and a Chinese flavor. Everyone else is in the middle with the scraps.
- hitpointdrew 5y ago
  Because they don't work. Many EU countries have attempted them and they have all failed. There are a host of issues with wealth taxes, one of which is simply placing value on illiquid assets is difficult. How much is that rare art price worth? Well no one knows until you put it on the market. Then there are issues with immaterial things like rights, that would be very tricky to value. What if you had the rights to all of Bill Cosby's recorded stand-up acts? That could have been valued highly before the rape convictions, now it is essentially worthless. A wealth tax would just create a battle of litigation between the wealthy and IRS, and the wealthy would win. The real solution is to just have a VAT like every other developed nation in the world, is the only way to get slice of the pie from the wealthy.
  - ekelsen 5y ago
    It's not that hard to find a price for a rare art piece, or almost any other asset. Make the owner declare its value, tax it at the value. But anyone can buy it at that price. If they want to keep it, they'll need to value it correctly, and thus it will get taxed correctly.
    - tornato7 5y ago
      This is called a Harberger tax and there has been extensive research on it: https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=12668&context=journal_articles https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?arti...
brianfitz 5y ago
This would also affect most home owners. They purchase a home, it goes up in value, and they refinance or take a second loan rather than sell the property. The wealthy do this as well with property, art, and securities. Trying to tax unrealized gains (like a home that has appreciated in value) would be a new mess of tax legislation with holes you could drive a semi-truck through.
- telchar 5y ago
  This sort of wealth tax probably would be targeted at amounts over a $5-50M threshold so it would never hit the primary residence of anyone except billionaires, who could surely pay cash.
  - brianfitz 5y ago
    So we’ve created one loophole. What if I buy multiple properties below the threshold? Is the limit per household? If so, does this apply to people heavily leveraged with little net worth who own many rental properties? The rent is income, but they often make improvements to the homes and take a cash-out refinance to pay for the cash down payment on a new property. If we do this to homes, and the wealthy move their money to a new place, such as venture capital, do we try and re-price those illiquid assets each year? If one IPO’s and they take a loan against the stock to buy a home, do you give them their previous year’s mark-to-market payment back to them if the stock goes down the following year and they get a margin call? I’m just going through a few scenarios but this would quickly inflate the tax code to an almost unmanageable state without creating just as many more new loopholes. Imagine trying to grow a startup and being worth X on paper with no actual gains or money in the bank. If you don’t include it, it suddenly becomes a tool for someone else to use within the assets you’ve excluded. If you don’t exclude it, you may force an early sale of promising new businesses to their competitors to cover a tax bill on the unrealized gains.
    - drdec 5y ago
      > The rent is income, but they often make improvements to the homes and take a cash-out refinance to pay for the cash down payment on a new property. This is pretty much the situation that the tax is designed to combat - people using their assets to increase their wealth without paying taxes. So yes, if you did that, you would need to pay taxes on the new money in the refinance. I don't see an issue if that makes this business model unprofitable or untenable. > If we do this to homes, and the wealthy move their money to a new place, such as venture capital, do we try and re-price those illiquid assets each year? There's no need to price anything. You value the assets put up as collateral as the amount of the loan they are securing. > If one IPO’s and they take a loan against the stock to buy a home, do you give them their previous year’s mark-to-market payment back to them if the stock goes down the following year and they get a margin call? Nope. It's just like selling and immediately re-purchasing. > Imagine trying to grow a startup and being worth X on paper with no actual gains or money in the bank. Ok, but nothing happens unless you borrow against it. I'm not sure what scenario you are imagining here.
tornato7 5y ago
If you take loans secured by unrealized gains, don't you need to eventually sell some of those gains to repay the loan? You can only take out so many loans until the interest starts stacking up.
- pnutjam 5y ago
  You can manipulate the payment of taxes and only pay off the loans when you have other offsets to avoid paying taxes. 9 years no taxes, year 10 I pay off my loans and donate a chair to a University.
  - dahfizz 5y ago
    The solution would be to close the other loopholes used to not pay taxes on year 10.
    - pnutjam 5y ago
      Please, there are no legislative solutions open to America. We get one shot, so it needs to go big.
aantix 5y ago
>the wealthy take loans secured by unrealized gains in order to finance their lifestyle Eventually they have to sell stock to pay back the loan? Aren't they just delaying the taxation?
- bklyn11201 5y ago
  Exactly, they are just delaying taxation. If their investments return less than loan interest, they will need to begin selling assets to pay the loans. If their equity compounds at a rate higher than the interest rate, then they can continue to defer until death where they can pass on to heirs and take advantage of basis step-up. https://www.thebalance.com/how-the-stepped-up-basis-loophole-works-357485 https://www.thebalance.com/how-the-stepped-up-basis-loophole...
- HWR_14 5y ago
  If they delay taxation until death, the asset's basis resets and the only tax owed would be estate tax.
lend000 5y ago
I've seen this idea posted a few times without data, and it isn't convincing. The wealthy need to pay back those loans, and realize gains in order to do so. Sure, they can maintain a higher average debt/expenses ratio collateralized by unrealized gains, but the real problems here are: 1. When they do realize gains, the tax brackets are severely broken such that someone realizing $2Billion in capital gains pays a lower effective rate than someone with 1/10000th that number in income. 2. We live in a financial environment in which the Fed will rescue the stock market no matter what, creating asset inflation and making this a relatively reliable strategy, whereas there should be more theoretical risk in doing this. Bear markets, albeit painful, are the only times in recent history where wealth inequality decreases as the economy corrects and reallocates capital [0]. Staving them off at all costs for the last few decades via easy monetary policy is arguably one of the greatest contributors to the rise in wealth inequality, alongside poorly graduated income tax brackets and (to a lesser degree) automation. Chart: [0] https://fred.stlouisfed.org/series/WFRBST01134 https://fred.stlouisfed.org/series/WFRBST01134
- larkost 5y ago
  In many of the cases of those loans, they are structured to be payable only after the death of the person receiving the loans. And at that moment the cost basis for all of the investments goes to the price at the end of the day of death... bypassing all of the capital gains taxes. That is the real problem there. I do completely agree that treating capital gains more favorably than earned income is just crazy (even though I personally benefit from it).
  - lend000 5y ago
    Do you have a source for this? I just struggle to believe that lenders would make loans like that on a large scale, without some major caveats.
    - TheCoelacanth 5y ago
      I don't think the loans actually need to be structured like that to achieve the same effect. You can just pay off the loan by taking out another loan. There would be some risk that you couldn't get another loan, but if you're only borrowing 10% of your net worth, it's probably an extremely small risk.
reaperducer 5y ago
the wealthy take loans secured by unrealized gains in order to finance their lifestyle. It's even worse than that. The interest on those loans is tax deductible, according to the New York Times: https://www.nytimes.com/2021/06/08/us/politics/income-taxes-bezos-musk-buffett.html https://www.nytimes.com/2021/06/08/us/politics/income-taxes-...
- HWR_14 5y ago
  The interest being tax deductible isn't too bad. If they had to pay taxes on the capital gains as soon as they borrowed against it, it would be a fine way for them to finance their lifestyle
  - NaturalPhallacy 5y ago
    By virtue of being rich, they get loans to further increase their wealth, and then reduce their taxes because of the interest on that wealth increase. If people really understood how this all essentially boils down to the rich not having to pay taxes, purely by being wealthy and being given loans on it, they'd riot tomorrow.
    - randomswede 5y ago
      There are rumours that some wealthy people are in sufficiently dire straits that the loan-based vehicle for a flash lifestyle is now supported only by a very small number of banks (for them) and their debt instruments are valued well below a 1:1 rate. It would be interesting to see what happened if a sufficient amount of that debt was bought up and forced to be repaid.
      - HWR_14 5y ago
        Are there any sources you can point to?
        randomswede 5y ago
eloff 5y ago
> The big takeaway I got from the article missing in your summary is that the wealthy take loans secured by unrealized gains in order to finance their lifestyle. Which they have to pay back with post tax money. I don't see a problem here. At best this is tax deferral until capital gains are realized, something we allow for good reason - paying real money to cover tax on paper gains (which could vanish) is a problem, and could even force you into giving away an illiquid asset because you can't afford the tax on it. They're gambling their stock will perform better than the interest rate on the loan. That's a reasonable gamble. Taxing a loan seems silly.
- robotresearcher 5y ago
  > Which they have to pay back with post tax money Unless they die first. If heirs hold on to inherited property for a while (2 years?) they can sell it at the cost basis reset to the value at the time they inherited. They pay back the loan with the before-death gains untaxed. The original buyer got to effectively realize their gains via loans, untaxed. https://smartasset.com/taxes/how-to-avoid-paying-capital-gains-tax-on-inherited-property https://smartasset.com/taxes/how-to-avoid-paying-capital-gai...
  - eloff 5y ago
    Sounds like a problem with how inheritance is taxed, not loans.
- JAlexoid 5y ago
  Actually it's a feature that rich people get. We bought a house last year and I was forced by QuickenLoans to liquidate my Tesla positions, that appreciated 5x and incurred short term capital gains. Were I richer, I could have avoided liquidating my long positions and pay proportionally less in taxes. The most annoying part is that in the end they didn't even need all of my stock portfolio liquidated, only about 30% to cover closing costs. Yet I got hit by a 5 figure tax bill because of it. In short - the system literally setup to extract as much as possible out of everyone, other than the wealthiest/most powerful. And that includes banks, government and lenders.
smileysteve 5y ago
The most politically tenable way to end long term unrealized gains is 1. drop the corporate tax rate to 0%. Most notably, these corporations would follow the REIT tax policy that requires them to distribute > 90% of taxable income to shareholders. 2. Move Social Security and Medicare into the Progressive Income Tax (it being flat on income is regressive) 3. Offset #1 and #2 with a higher income tax (especially for capital gains)
- HWR_14 5y ago
  For (1) You can set up pass thru entities that pay 0% tax and distribute 100% of their profits. The income is then taxed as regular income by the shareholders.
bendbro 5y ago
> So what if we found a way to make a rule that using unrealized gains as collateral for a loan was, for tax purposes, the same as realizing the gains? (You might need to tweak the rule for fairness but the basic point remains.) Lenders will quickly adapt to give loans without requiring collateral
- JAlexoid 5y ago
  And insurance companies will stay clear of unrecoverable loans.

by drdec 5y ago

TimPC 5y ago

Capital gains being delayed is not a direction we want to pursue. There are huge problems with unsellable stock in venture-backed start-ups and other situations where you can end up owning a massively valued asset that you can't sell to pay the taxes on. Said asset could go to zero without you ever realizing money. I don't think people should lose their start-up stock over taxes, or face putting their entire wealth on the line on a gamble the company pays off. Keep in mind it's not unheard of to have stock worth $2+ million for an early employee in a company that goes to zero. Even more relatable to the average person: If your house price goes up too quickly you can be forced to sell to afford paying the capital gains on it.

rhino369 5y ago
No different than me selling stock A, paying capital gains and then buying stock B, which could go to zero. You can handle your hypo the same way the tax system handles mine. You can deduct the capital loss from future gains.
- nilsbunger 5y ago
  Sure it’s different. You might not have cash to pay those taxes. When you sold and bought, you had an opportunity to set aside the $$ to pay taxes
  - rhino369 5y ago
    If you are borrowing money, you have the opportunity to set that money aside to pay taxes. It's really no different.
    - nilsbunger 5y ago
      It's not easy to get a loan against illiquid assets in many cases. And even if you get a loan, if the asset goes to zero you still owe the loan balance, which could be huge compared to your normal finances. And you pay interest on that loan. It could work in some cases but I don't see how it's the same as selling stock A and buying stock B.
- PaulDavisThe1st 5y ago
  You may never have future gains to match the loss. Why would we want a system that taxes people on an unrealized gain and then (maybe) gives it back to them over coming years?
  - deleted 5y ago
    [deleted]
  - sangnoir 5y ago
    > You may never have future gains to match the loss. C'est la vie. That's how Capital Loss deductions, Electric Vehicle credits and other non-refundable tax credits currently work: individuals may not have enough upside to maximize their benefits, That's just how the system works as it is impossible to balance everyone's competing scenarios. If you are eligible for a $7500 EV credit but only paid $3000 in taxes, you'll only get that $3000 back, and not the full $7500.
  - pnutjam 5y ago
    Most American's live in that system, it's called being an employee...
  - munk-a 5y ago
    I think we'd want that tax income because a dollar today is more valuable than a dollar tomorrow - making sure we increase cash flow in the short term and stabilize expected cash flow allows us to more accurately set the budget.
mcguire 5y ago
Or, perhaps, stop accepting payment that may be valueless when you try to access it. And stop trying to get paid in a way that hides your income from the tax system.
unclewalter 5y ago
To me, the parent wasn’t saying an asset holder would need to pay taxes on the asset unless they used it as collateral. To me, this makes a lot of sense. If someone owns a startup and worries tax implications would overextend them if the value was taxed, they shouldn’t use it as collateral on a loan. I may be missing your point though.
- yebyen 5y ago
  But you basically always do use your house as collateral on the mortgage loan. I think this is a more radical change than you have realized.
  - saalweachter 5y ago
    You could pin it to when loans are issued rather than their existence. That would only affect home refinancing, which will still be a considerable number of people.
  - lupire 5y ago
    That's different, because the house is collateral for itself, effectively a "rent to own", not for money that can be spent elsewhere.
- nmfisher 5y ago
  I agree, I don’t see why income tax couldn’t be levied on any amount greater than $X borrowed/secured by an asset as collateral. For all intents and purposes, it is income and should be taxed as such.
- koheripbal 5y ago
  I don't see why we care that they're using an asset as collateral for a loan. They still need to pay back that loan with post-tax money. Maybe they're kicking the can down the road, but that's their choice. The real issue here is that super rich are, at the end of that road, donating shares to their non-profits, tax free. ...and that their children then have access to that non-profit and all of its assets, again without income or estate tax. The big hole here isn't the unrealized gains - it's the "charitable Foundations" that are a complete scam.
jbay808 5y ago
I'd be happy if I could give a percentage of the shares themselves to the government as a tax payment (paying tax on the shares specifically), so I don't have to worry about the risk that they're overvalued by the tax agency.
- IncRnd 5y ago
  No, you wouldn't. Unrealized gains being taxed would eventually make you declare bankruptcy or live on the street. The government wouldn't let you pay in stock but sell stock yourself.
- UnpossibleJim 5y ago
  So, unless I miss what you're saying, is that you propose that the government own a share in every business that is created by way of "taxation". Is that not what you're proposing in this statement? Do they also get to leverage these shares to have a vote as to the business decisions, like any other share holder does? (assuming they have enough shares in this hypothetical share tax)
  - ljf 5y ago
    Not my idea, nor one I think is perfect, but I assume they are saying this would no be every company, just those where they would rather give shares than pay tax. No doubt they would be loads of ways to scam this though, setting up supposedly valuable companies to 'pay' a big tax bill, then rinse the company or allow it to fail while diverting profit elsewhere.
    - UnpossibleJim 5y ago
      I was just saying, it sounds an awful lot like forced communism through taxation. A share in a company is a portion and a vote in a company, however small.
    - jbay808 5y ago
      I can't think of a way to scam it, as long as they only allow this method of payment for taxes assessed on the asset itself, rather than as a substitute method of payment for other taxes owed. It would be an interesting idea to explore and could potentially be a massive boon to risky startups by allowing them to hand out equity more freely as incentives without worrying about the accompanying tax burden.
_archon_ 5y ago
In your house example. this is only if the homeowner takes out a loan against the new increased value of the house, and then pays tax on a portion of that loan. If your house appreciates and you don't play financial games with it, the only increase in costs would come from a local tax reassessment.
- taeric 5y ago
  I think it is assumed a wealth tax would not require taking out a loan. You can assume that your home would be exempt, but more likely it will just be a standard allowance deductable. This isn't a new thing. Property taxes are the wealth tax that already exists, at large. That is... You're point on a tax reassessment is exactly what is being discussed. And if the tax on your wealth is increased as a form of capital wealth, expect the rates to be higher that most property taxes. Edit: I see I missed that this was a hypothetical on touching collateral. Not sure how I feel on that one. In large because I know so many folks are essentially tricked by marketing to refinance all the time.
- booblik 5y ago
  So if you decide to refinance your mortgage that would subject you to a tax? What is wrong with just paying increased property taxes?
jmcqk6 5y ago
>a massively valued asset that you can't sell In this case, the value is not well defined. If you don't have a market, you cannot determine the value. You may think it's extremely valuable, but if you have no one else willing to recognize that value, then it doesn't really exist.
- tyre 5y ago
  The value is precisely defined by a 409a valuation. That's the price options are offered at (the strike price) and what the FMV is.
  - 6gvONxR4sf7o 5y ago
    Aren’t 409a valuations famously gamed?
  - ardit33 5y ago
    It is a bogus valuation... as it is not market based. If you can't sell the stock, and nobody wants to buy it, (yes, there are startups that are in this position), then that valuation is mostly wishful thinking. Often the valuation undervalues the company as well, but that's another story.
  - lupire 5y ago
    That's the value when the valuation happens, which can be years before exercise.
HWR_14 5y ago
A house's capital gains actually have special treatment. But in some states property values for taxes do rise by huge amounts.

enriquto 5y ago

> I agree that a wealth tax is not the way to go. Why not? A tax on wealth, even a small one, is the only mechanism to avoid a long-term drift towards a feudal-like state of society.

Spooky23 5y ago
Exactly. The strategic problem here is that the changes that took place in the Vietnam era and 80s ultimately creates a concentration of capital and power that is beyond anything we’ve seen since Roman times. In the mid-term we’re looking at some sort of weird hybrid plutocrat/government hybrid with an American flavor and a Chinese flavor. Everyone else is in the middle with the scraps.
hitpointdrew 5y ago
Because they don't work. Many EU countries have attempted them and they have all failed. There are a host of issues with wealth taxes, one of which is simply placing value on illiquid assets is difficult. How much is that rare art price worth? Well no one knows until you put it on the market. Then there are issues with immaterial things like rights, that would be very tricky to value. What if you had the rights to all of Bill Cosby's recorded stand-up acts? That could have been valued highly before the rape convictions, now it is essentially worthless. A wealth tax would just create a battle of litigation between the wealthy and IRS, and the wealthy would win. The real solution is to just have a VAT like every other developed nation in the world, is the only way to get slice of the pie from the wealthy.
- ekelsen 5y ago
  It's not that hard to find a price for a rare art piece, or almost any other asset. Make the owner declare its value, tax it at the value. But anyone can buy it at that price. If they want to keep it, they'll need to value it correctly, and thus it will get taxed correctly.
  - tornato7 5y ago
    This is called a Harberger tax and there has been extensive research on it: https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=12668&context=journal_articles https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?arti...

brianfitz 5y ago

This would also affect most home owners. They purchase a home, it goes up in value, and they refinance or take a second loan rather than sell the property. The wealthy do this as well with property, art, and securities. Trying to tax unrealized gains (like a home that has appreciated in value) would be a new mess of tax legislation with holes you could drive a semi-truck through.

telchar 5y ago
This sort of wealth tax probably would be targeted at amounts over a $5-50M threshold so it would never hit the primary residence of anyone except billionaires, who could surely pay cash.
- brianfitz 5y ago
  So we’ve created one loophole. What if I buy multiple properties below the threshold? Is the limit per household? If so, does this apply to people heavily leveraged with little net worth who own many rental properties? The rent is income, but they often make improvements to the homes and take a cash-out refinance to pay for the cash down payment on a new property. If we do this to homes, and the wealthy move their money to a new place, such as venture capital, do we try and re-price those illiquid assets each year? If one IPO’s and they take a loan against the stock to buy a home, do you give them their previous year’s mark-to-market payment back to them if the stock goes down the following year and they get a margin call? I’m just going through a few scenarios but this would quickly inflate the tax code to an almost unmanageable state without creating just as many more new loopholes. Imagine trying to grow a startup and being worth X on paper with no actual gains or money in the bank. If you don’t include it, it suddenly becomes a tool for someone else to use within the assets you’ve excluded. If you don’t exclude it, you may force an early sale of promising new businesses to their competitors to cover a tax bill on the unrealized gains.
  - drdec 5y ago
    > The rent is income, but they often make improvements to the homes and take a cash-out refinance to pay for the cash down payment on a new property. This is pretty much the situation that the tax is designed to combat - people using their assets to increase their wealth without paying taxes. So yes, if you did that, you would need to pay taxes on the new money in the refinance. I don't see an issue if that makes this business model unprofitable or untenable. > If we do this to homes, and the wealthy move their money to a new place, such as venture capital, do we try and re-price those illiquid assets each year? There's no need to price anything. You value the assets put up as collateral as the amount of the loan they are securing. > If one IPO’s and they take a loan against the stock to buy a home, do you give them their previous year’s mark-to-market payment back to them if the stock goes down the following year and they get a margin call? Nope. It's just like selling and immediately re-purchasing. > Imagine trying to grow a startup and being worth X on paper with no actual gains or money in the bank. Ok, but nothing happens unless you borrow against it. I'm not sure what scenario you are imagining here.

tornato7 5y ago

If you take loans secured by unrealized gains, don't you need to eventually sell some of those gains to repay the loan? You can only take out so many loans until the interest starts stacking up.

pnutjam 5y ago
You can manipulate the payment of taxes and only pay off the loans when you have other offsets to avoid paying taxes. 9 years no taxes, year 10 I pay off my loans and donate a chair to a University.
- dahfizz 5y ago
  The solution would be to close the other loopholes used to not pay taxes on year 10.
  - pnutjam 5y ago
    Please, there are no legislative solutions open to America. We get one shot, so it needs to go big.

aantix 5y ago

>the wealthy take loans secured by unrealized gains in order to finance their lifestyle Eventually they have to sell stock to pay back the loan? Aren't they just delaying the taxation?

bklyn11201 5y ago
Exactly, they are just delaying taxation. If their investments return less than loan interest, they will need to begin selling assets to pay the loans. If their equity compounds at a rate higher than the interest rate, then they can continue to defer until death where they can pass on to heirs and take advantage of basis step-up. https://www.thebalance.com/how-the-stepped-up-basis-loophole-works-357485 https://www.thebalance.com/how-the-stepped-up-basis-loophole...
HWR_14 5y ago
If they delay taxation until death, the asset's basis resets and the only tax owed would be estate tax.

lend000 5y ago

I've seen this idea posted a few times without data, and it isn't convincing. The wealthy need to pay back those loans, and realize gains in order to do so. Sure, they can maintain a higher average debt/expenses ratio collateralized by unrealized gains, but the real problems here are: 1. When they do realize gains, the tax brackets are severely broken such that someone realizing $2Billion in capital gains pays a lower effective rate than someone with 1/10000th that number in income. 2. We live in a financial environment in which the Fed will rescue the stock market no matter what, creating asset inflation and making this a relatively reliable strategy, whereas there should be more theoretical risk in doing this. Bear markets, albeit painful, are the only times in recent history where wealth inequality decreases as the economy corrects and reallocates capital [0]. Staving them off at all costs for the last few decades via easy monetary policy is arguably one of the greatest contributors to the rise in wealth inequality, alongside poorly graduated income tax brackets and (to a lesser degree) automation. Chart: [0] https://fred.stlouisfed.org/series/WFRBST01134 https://fred.stlouisfed.org/series/WFRBST01134

larkost 5y ago
In many of the cases of those loans, they are structured to be payable only after the death of the person receiving the loans. And at that moment the cost basis for all of the investments goes to the price at the end of the day of death... bypassing all of the capital gains taxes. That is the real problem there. I do completely agree that treating capital gains more favorably than earned income is just crazy (even though I personally benefit from it).
- lend000 5y ago
  Do you have a source for this? I just struggle to believe that lenders would make loans like that on a large scale, without some major caveats.
  - TheCoelacanth 5y ago
    I don't think the loans actually need to be structured like that to achieve the same effect. You can just pay off the loan by taking out another loan. There would be some risk that you couldn't get another loan, but if you're only borrowing 10% of your net worth, it's probably an extremely small risk.

reaperducer 5y ago

the wealthy take loans secured by unrealized gains in order to finance their lifestyle. It's even worse than that. The interest on those loans is tax deductible, according to the New York Times: https://www.nytimes.com/2021/06/08/us/politics/income-taxes-bezos-musk-buffett.html https://www.nytimes.com/2021/06/08/us/politics/income-taxes-...

HWR_14 5y ago
The interest being tax deductible isn't too bad. If they had to pay taxes on the capital gains as soon as they borrowed against it, it would be a fine way for them to finance their lifestyle
- NaturalPhallacy 5y ago
  By virtue of being rich, they get loans to further increase their wealth, and then reduce their taxes because of the interest on that wealth increase. If people really understood how this all essentially boils down to the rich not having to pay taxes, purely by being wealthy and being given loans on it, they'd riot tomorrow.
  - randomswede 5y ago
    There are rumours that some wealthy people are in sufficiently dire straits that the loan-based vehicle for a flash lifestyle is now supported only by a very small number of banks (for them) and their debt instruments are valued well below a 1:1 rate. It would be interesting to see what happened if a sufficient amount of that debt was bought up and forced to be repaid.
    - HWR_14 5y ago
      Are there any sources you can point to?
      - randomswede 5y ago

eloff 5y ago

> The big takeaway I got from the article missing in your summary is that the wealthy take loans secured by unrealized gains in order to finance their lifestyle. Which they have to pay back with post tax money. I don't see a problem here. At best this is tax deferral until capital gains are realized, something we allow for good reason - paying real money to cover tax on paper gains (which could vanish) is a problem, and could even force you into giving away an illiquid asset because you can't afford the tax on it. They're gambling their stock will perform better than the interest rate on the loan. That's a reasonable gamble. Taxing a loan seems silly.

robotresearcher 5y ago
> Which they have to pay back with post tax money Unless they die first. If heirs hold on to inherited property for a while (2 years?) they can sell it at the cost basis reset to the value at the time they inherited. They pay back the loan with the before-death gains untaxed. The original buyer got to effectively realize their gains via loans, untaxed. https://smartasset.com/taxes/how-to-avoid-paying-capital-gains-tax-on-inherited-property https://smartasset.com/taxes/how-to-avoid-paying-capital-gai...
- eloff 5y ago
  Sounds like a problem with how inheritance is taxed, not loans.
JAlexoid 5y ago
Actually it's a feature that rich people get. We bought a house last year and I was forced by QuickenLoans to liquidate my Tesla positions, that appreciated 5x and incurred short term capital gains. Were I richer, I could have avoided liquidating my long positions and pay proportionally less in taxes. The most annoying part is that in the end they didn't even need all of my stock portfolio liquidated, only about 30% to cover closing costs. Yet I got hit by a 5 figure tax bill because of it. In short - the system literally setup to extract as much as possible out of everyone, other than the wealthiest/most powerful. And that includes banks, government and lenders.

smileysteve 5y ago

The most politically tenable way to end long term unrealized gains is 1. drop the corporate tax rate to 0%. Most notably, these corporations would follow the REIT tax policy that requires them to distribute > 90% of taxable income to shareholders. 2. Move Social Security and Medicare into the Progressive Income Tax (it being flat on income is regressive) 3. Offset #1 and #2 with a higher income tax (especially for capital gains)

HWR_14 5y ago
For (1) You can set up pass thru entities that pay 0% tax and distribute 100% of their profits. The income is then taxed as regular income by the shareholders.

bendbro 5y ago

> So what if we found a way to make a rule that using unrealized gains as collateral for a loan was, for tax purposes, the same as realizing the gains? (You might need to tweak the rule for fairness but the basic point remains.) Lenders will quickly adapt to give loans without requiring collateral

JAlexoid 5y ago
And insurance companies will stay clear of unrecoverable loans.