6 ms·

A couple of questions I would love to see some info on: 1) if somebody actually sold say 100M in stock at long term cap gains rates they should be paying rough

by xt00 5y ago

A couple of questions I would love to see some info on: 1) if somebody actually sold say 100M in stock at long term cap gains rates they should be paying roughly 15% tax, but in these cases people paid far lower than 15%, so they must offset those gains with something — what was it? 2) borrowing say 100M and using their large qty of stock as collateral at say 2% interest rate means you can buy stuff with that money then they pay it back later, but how? If they sell stock to pay it back later, then in that year they should have to pay tax in that year.. so ultimately the cash flow needs to be tracked.. if somebody buys a sports team for 2B, where did they get the cash for that? Did they buy it by paying the person in stock? Would be great to understand how people are doing this kind of stuff because it seems like the old line about “not taxing the job creators” translating to somebody only paying 1% tax might be fine if that was the societal trade we are making but if that person is not actually benefiting society in any way, then that person paying ultra low taxes does seem unfair.

ttul 5y ago
Well, I think the strategy is to keep balancing your gains and losses to minimize taxes until you die, by which point you’ve transferred all your wealth out tax-efficiently through trusts.
- gruez 5y ago
  ...by taking out loans and not paying them back? I'm not sure why any bank would sign up for that.
  - m_ke 5y ago
    https://www.investopedia.com/articles/personal-finance/100515/heres-how-deduct-your-stock-losses-your-tax-bill.asp https://www.investopedia.com/articles/personal-finance/10051...
    - gruez 5y ago
      How is this relevant?
  - triceratops 5y ago
    A HELOC is one example of a loan whose principal never needs to be paid off. As long as you keep making interest payments and the house keeps its value, the bank is happy.
jeremy_arnold 5y ago
OP here. Can give some partial answers. 1. Lots of possible deductions. Charitable giving is a big one here. I guess we'll see from future instalments in the ProPublica series which ones were specifically used. 2. You can roll-over loans by borrowing new money to pay back old debt, up to a practical cap of a max % of collateralized share value. And this is worth it if the expected growth on your shares is higher than interest on the loans. But at some point you or an heir will have to realize gains if you want to exceed that practical cap -- or if the loans get called. Bezos could probably raise $2bn for a sports franchise on loan no problem coz that's only ~1% of his shares. If you're a regular billionaire with say $4-5bn in shares, much harder. The meta point here though is that the taxes are always going to be paid at some point, and deferring that point to the future is fine if the rate of growth on the gov's share exceeds their borrowing costs (currently between 0-2% depending how you look at it).
- dwighttk 5y ago
  Haven’t there been tax holidays in the past where gains can be realized at a much lower rate so with this level of wealth it is worth putting it off just in case one of those rolls around again? (Or is that just an urban legend I’ve been told?)
  - wmf 5y ago
    Yeah, there's a definite asymmetry between billionaires with 30-50 year horizons and politicians worrying about 4-8 years.
  - jeremy_arnold 5y ago
    I know they happen for offshore wealth getting repatriated. Possible that they've existed for onshore too? Interesting thing to look into. But even if so, that just seems a vanilla case of "Congress should be held accountable to not give away the farm", as it would be a pretty perverse incentive if the rich felt that such a holiday were likely to arise.
    - midasuni 5y ago
sroussey 5y ago
The loans are usually interest only.
WillPostForFood 5y ago
but in these cases people paid far lower than 15%, so they must offset those gains with something — what was it? Be careful. ProPublica is conflating "wealth gain", aka unrealized, unsold stock gains, with income and actual capital gains. ultrawealthy typically hold fast to shares in the companies they’ve founded. Many titans of the 21st century sit on mountains of what are known as unrealized gains, the total size of which fluctuates each day as stock prices rise and fall. Of the $4.25 trillion in wealth held by U.S. billionaires, some $2.7 trillion is unrealized
- xt00 5y ago
  100% agree that propublica didn’t do a good job, but the question remains, if somebody makes the claim that some billionaire sold some stock at long term gain prices, then in at least some tax year you would expect that massive amount of money to dwarf any losses they had, so if they truly paid long term cap gains then in one particular year their tax rate should be close to 15%. But if it’s not over long periods of time, then they have some massive method of offsetting gains. People saying “oh but they pay capital gains” or “oh they offset with losses” doesn’t make any actual sense if the numbers are huge. Like imagine some billionaire explaining to his buddy, “yea I didn’t pay any tax on the 1B in stock I sold last year because I offsetted the gains with 150M in losses rather than paying the taxes, aren’t you impressed?” Its like huh? It seems like way more likely the “losses” are actually paper losses like a building cost depreciating in value “supposedly” but actually it does not depreciate like that in reality.. so it would be great to see how this stuff works over some period of time rather than just in random one off cases. Maybe the trick is simply just borrow for your whole life then when you die pay back the loans but somehow that payback process results in limited taxes somehow.
  - quickthrowman 5y ago
    > Maybe the trick is simply just borrow for your whole life then when you die pay back the loans but somehow that payback process results in limited taxes somehow. The ‘somehow’ is the stepped up basis upon death loophole: https://www.thebalance.com/how-the-stepped-up-basis-loophole-works-357485 https://www.thebalance.com/how-the-stepped-up-basis-loophole... The cost basis of an asset when inherited is set to the value on the day the owner died.
m_ke 5y ago
An interesting (and probably obvious to most) thing mentioned in the propublica articles is that Bezos used investment losses to offset some of the realized capital gains. As in he was able to make speculative bets on startups with no downside risk because he could either gain spectacular appreciation on the ones that hit or use the failures to offset his expenses (realized gains).
- nradov 5y ago
  The effective risk is reduced but not zero. If you lose money investing in a failed startup you're still financially worse off even after accounting for the capital gains offset.
- nullc 5y ago
  Writing off investment losses does not eliminate or even reduce the risk! It avoids you paying taxes on money you didn't actually earn. Our income/gains taxes avoid confiscating your (hopefully productive!) property by only taxing you on the profits you realize, which both enables and encourages you to keep up what you're doing, producing more prosperity for yourself, your community, and tax income for the government. It doesn't reward you for taking risks, but it doesn't punish you for taking them either. If you take a risk, lose money, and still get taxed on that money you're getting punished for taking a risk.
  - m_ke 5y ago
    Yes, but when you're filthy rich and sit on a mountain of unrealized gains you get to be selective about how much you pull out. You can invest 100 million in startups knowing that most of it will go to 0, allowing you to later offset anything that you cash out with losses.
    - nullc 5y ago
      Yes and? The losses are no less real! You're still much better not having them.
      - 5y ago
loeg 5y ago
> if somebody actually sold say 100M in stock at long term cap gains rates they should be paying roughly 15% tax No, capital gains tax has brackets -- it isn't a flat 15% -- and the Net Investment Income Tax also applies; for $100M in cap gains, you would pay 23.8% (20% bracket + 3.8% NIIT) on the majority of those gains (everything over $440k single / $500k MFJ).
ThrustVectoring 5y ago
If you die with $100m of stock and $10m in loans, you pay estate taxes on $90m of net assets and $0 of capital gains (your heirs get a step-up in basis on death). If you die with $90m of stock because you sold $10m of it for consumption, you pay the same estate taxes and additional capital gains on the sale. In short, the estate pays off the loans by selling stock immediately after death.

by xt00 5y ago

ttul 5y ago

Well, I think the strategy is to keep balancing your gains and losses to minimize taxes until you die, by which point you’ve transferred all your wealth out tax-efficiently through trusts.

gruez 5y ago
...by taking out loans and not paying them back? I'm not sure why any bank would sign up for that.
- m_ke 5y ago
  https://www.investopedia.com/articles/personal-finance/100515/heres-how-deduct-your-stock-losses-your-tax-bill.asp https://www.investopedia.com/articles/personal-finance/10051...
  - gruez 5y ago
    How is this relevant?
- triceratops 5y ago
  A HELOC is one example of a loan whose principal never needs to be paid off. As long as you keep making interest payments and the house keeps its value, the bank is happy.

jeremy_arnold 5y ago

OP here. Can give some partial answers. 1. Lots of possible deductions. Charitable giving is a big one here. I guess we'll see from future instalments in the ProPublica series which ones were specifically used. 2. You can roll-over loans by borrowing new money to pay back old debt, up to a practical cap of a max % of collateralized share value. And this is worth it if the expected growth on your shares is higher than interest on the loans. But at some point you or an heir will have to realize gains if you want to exceed that practical cap -- or if the loans get called. Bezos could probably raise $2bn for a sports franchise on loan no problem coz that's only ~1% of his shares. If you're a regular billionaire with say $4-5bn in shares, much harder. The meta point here though is that the taxes are always going to be paid at some point, and deferring that point to the future is fine if the rate of growth on the gov's share exceeds their borrowing costs (currently between 0-2% depending how you look at it).

dwighttk 5y ago
Haven’t there been tax holidays in the past where gains can be realized at a much lower rate so with this level of wealth it is worth putting it off just in case one of those rolls around again? (Or is that just an urban legend I’ve been told?)
- wmf 5y ago
  Yeah, there's a definite asymmetry between billionaires with 30-50 year horizons and politicians worrying about 4-8 years.
- jeremy_arnold 5y ago
  I know they happen for offshore wealth getting repatriated. Possible that they've existed for onshore too? Interesting thing to look into. But even if so, that just seems a vanilla case of "Congress should be held accountable to not give away the farm", as it would be a pretty perverse incentive if the rich felt that such a holiday were likely to arise.
  - midasuni 5y ago

sroussey 5y ago

The loans are usually interest only.

WillPostForFood 5y ago

but in these cases people paid far lower than 15%, so they must offset those gains with something — what was it? Be careful. ProPublica is conflating "wealth gain", aka unrealized, unsold stock gains, with income and actual capital gains. ultrawealthy typically hold fast to shares in the companies they’ve founded. Many titans of the 21st century sit on mountains of what are known as unrealized gains, the total size of which fluctuates each day as stock prices rise and fall. Of the $4.25 trillion in wealth held by U.S. billionaires, some $2.7 trillion is unrealized

xt00 5y ago
100% agree that propublica didn’t do a good job, but the question remains, if somebody makes the claim that some billionaire sold some stock at long term gain prices, then in at least some tax year you would expect that massive amount of money to dwarf any losses they had, so if they truly paid long term cap gains then in one particular year their tax rate should be close to 15%. But if it’s not over long periods of time, then they have some massive method of offsetting gains. People saying “oh but they pay capital gains” or “oh they offset with losses” doesn’t make any actual sense if the numbers are huge. Like imagine some billionaire explaining to his buddy, “yea I didn’t pay any tax on the 1B in stock I sold last year because I offsetted the gains with 150M in losses rather than paying the taxes, aren’t you impressed?” Its like huh? It seems like way more likely the “losses” are actually paper losses like a building cost depreciating in value “supposedly” but actually it does not depreciate like that in reality.. so it would be great to see how this stuff works over some period of time rather than just in random one off cases. Maybe the trick is simply just borrow for your whole life then when you die pay back the loans but somehow that payback process results in limited taxes somehow.
- quickthrowman 5y ago
  > Maybe the trick is simply just borrow for your whole life then when you die pay back the loans but somehow that payback process results in limited taxes somehow. The ‘somehow’ is the stepped up basis upon death loophole: https://www.thebalance.com/how-the-stepped-up-basis-loophole-works-357485 https://www.thebalance.com/how-the-stepped-up-basis-loophole... The cost basis of an asset when inherited is set to the value on the day the owner died.

m_ke 5y ago

An interesting (and probably obvious to most) thing mentioned in the propublica articles is that Bezos used investment losses to offset some of the realized capital gains. As in he was able to make speculative bets on startups with no downside risk because he could either gain spectacular appreciation on the ones that hit or use the failures to offset his expenses (realized gains).

nradov 5y ago
The effective risk is reduced but not zero. If you lose money investing in a failed startup you're still financially worse off even after accounting for the capital gains offset.
nullc 5y ago
Writing off investment losses does not eliminate or even reduce the risk! It avoids you paying taxes on money you didn't actually earn. Our income/gains taxes avoid confiscating your (hopefully productive!) property by only taxing you on the profits you realize, which both enables and encourages you to keep up what you're doing, producing more prosperity for yourself, your community, and tax income for the government. It doesn't reward you for taking risks, but it doesn't punish you for taking them either. If you take a risk, lose money, and still get taxed on that money you're getting punished for taking a risk.
- m_ke 5y ago
  Yes, but when you're filthy rich and sit on a mountain of unrealized gains you get to be selective about how much you pull out. You can invest 100 million in startups knowing that most of it will go to 0, allowing you to later offset anything that you cash out with losses.
  - nullc 5y ago
    Yes and? The losses are no less real! You're still much better not having them.
    - 5y ago

loeg 5y ago

> if somebody actually sold say 100M in stock at long term cap gains rates they should be paying roughly 15% tax No, capital gains tax has brackets -- it isn't a flat 15% -- and the Net Investment Income Tax also applies; for $100M in cap gains, you would pay 23.8% (20% bracket + 3.8% NIIT) on the majority of those gains (everything over $440k single / $500k MFJ).

ThrustVectoring 5y ago

If you die with $100m of stock and $10m in loans, you pay estate taxes on $90m of net assets and $0 of capital gains (your heirs get a step-up in basis on death). If you die with $90m of stock because you sold $10m of it for consumption, you pay the same estate taxes and additional capital gains on the sale. In short, the estate pays off the loans by selling stock immediately after death.