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> Well, one workaround would be to treat securitization of shares (eg for a loan) as a taxable event. This is a common (and currently legal) tax avoidance strat

> Well, one workaround would be to treat securitization of shares (eg for a loan) as a taxable event. This is a common (and currently legal) tax avoidance strategy. agreed. that should 100% be a taxable event and it's totally absurd that it's not. and i'm sure there's a lot of... lobbying that will never allow that kind of law to pass.

kyleee 5y ago
It does seem like a loophole, such funds when used as income should be taxed. Probably more complicated in practice but it does seem like a strategy that runs counter to the intent of taxation laws. And I'd bet if it was a strategy employed effectively by the 99% it would be vigorously labelled as tax evasion and dealt with accordingly
- bananabreakfast 5y ago
  This is not a loophole. Collateralizing a loan against assets does not produce income. It produces cash and an even larger liability. That loan still has to be paid off with separate, regularly taxed, income. Also this is a strategy used all the time by the 99%. It's called a second mortgage. This proposal would mean that taking out a loan against the equity in a home would become a taxable event.
  - bryanlarsen 5y ago
    Of course it's a loophole. Elon Musk takes essentially no salary, never sells his shares yet lives the life of a workaholic billionaire. The only reason he has any taxes at all is because he is taxed on his stock grants. He also has > $1B in debt. The first $500K in residential capital gains aren't taxable. I sure hope your second mortgage is less than that. Taxing the securitization of assets should cause a step up in the base cost of the asset. So it doesn't reduce the amount of tax you owe, it just changes when you owe it. (Unless you avoid the tax by dying).
  - ethbr0 5y ago
    I don't think anyone's arguing people should be taxed twice. What they are arguing is that individuals should be taxed at the event of first utility (that is, realizing value from the gains). And then the tax is paid, so not paid again, or offset, later. And what we're really talking about here is individuals using equity loans for the majority of their income.
artdigital 5y ago
I kinda disagree. Yes it's a loophole to get around tax, but taking a loan against assets you own should not be taxable. It's the same pathway that people use to take a loan against their property and other assets, and having to pay tax on that is absurd Similarly, stocks (or things like gold) that one owns have some worth, and using it as collateral for taking a loan against it is a completely valid thing to do
- ncallaway 5y ago
  Just put a reasonable threshold on it. Any assets, above $100M, used to collateralize a loan are taxed as if they are realized capital gains at the time that you collateralize the loan. I don't think the loan itself should be taxed, but if you use assets to collateralize a loan, those assets should be taxed as if they're realized income—since by taking the loan you are now "realizing" the value of those appreciating assets.
- scythe 5y ago
  Honestly, maybe people should pay taxes on that. Remember, it only applies to the gain in value, so loans up to the original purchase price would not be taxed. The tax is assessed based on the maximum collateralization minus the purchase price and minus any value previously taxed as a capital gain, as I understand it. In a practical sense, they have gained spending power they wouldn't have otherwise.
- trhway 5y ago
  >It's the same pathway that people use to take a loan against their property and other assets, and having to pay tax on that is absurd you bought house for $600K cash (for simplicity). Some years later the house appreciated to $1.5M, and you take out a $1M loan against it - you are obviously realizing a $400K of the value of the house as otherwise those additional $400K can only come from thin air. So those $400K of the realized value of the house (not the loan) need to be taxed with the house adjusted cost basis becoming $1M. If you sell the house later for $1.5M the remaining $500K would get taxed as the difference between sale proceeds and the adjusted cost basis.
- WalterBright 5y ago
gfodor 5y ago
That doesn’t make any sense, presuming you meant “collateralize.” I put up $100k of stock for a $100k loan, I do nothing, turn around and pay the money back, and now I have a tax bill? If I repeat this process, I can have an infinite tax liability with no realized gain or net income. Am I missing something?
- deleted 5y ago
  [deleted]
- yuliyp 5y ago
  No, the tax bill would come with an adjustment of cost basis. The second time there's no change in value so no tax bill.
- deleted 5y ago
  [deleted]
- awillen 5y ago
  The theoretical ability to create an infinite tax liability isn't an issue because people just won't do that. Also, you only tax people in this way if they're over a certain level of net worth/income.
- opportune 5y ago
  The “repeating the process” is entirely the problem. If you perpetually roll over your loans you are able to spend large amounts of money without ever realizing a cent of it, thus never paying taxes (since your estate would end up paying it but then financial trickery makes the realization there non taxable). It would be easy to avoid this infinite tax liability by not taking out an infinite amount of loans…
  - Anon1096 5y ago
    The problem here is with the step up in cost basis upon death, not getting loans against unrealized shares.
    - 5y ago

kyleee 5y ago

It does seem like a loophole, such funds when used as income should be taxed. Probably more complicated in practice but it does seem like a strategy that runs counter to the intent of taxation laws. And I'd bet if it was a strategy employed effectively by the 99% it would be vigorously labelled as tax evasion and dealt with accordingly

bananabreakfast 5y ago
This is not a loophole. Collateralizing a loan against assets does not produce income. It produces cash and an even larger liability. That loan still has to be paid off with separate, regularly taxed, income. Also this is a strategy used all the time by the 99%. It's called a second mortgage. This proposal would mean that taking out a loan against the equity in a home would become a taxable event.
- bryanlarsen 5y ago
  Of course it's a loophole. Elon Musk takes essentially no salary, never sells his shares yet lives the life of a workaholic billionaire. The only reason he has any taxes at all is because he is taxed on his stock grants. He also has > $1B in debt. The first $500K in residential capital gains aren't taxable. I sure hope your second mortgage is less than that. Taxing the securitization of assets should cause a step up in the base cost of the asset. So it doesn't reduce the amount of tax you owe, it just changes when you owe it. (Unless you avoid the tax by dying).
- ethbr0 5y ago
  I don't think anyone's arguing people should be taxed twice. What they are arguing is that individuals should be taxed at the event of first utility (that is, realizing value from the gains). And then the tax is paid, so not paid again, or offset, later. And what we're really talking about here is individuals using equity loans for the majority of their income.

artdigital 5y ago

I kinda disagree. Yes it's a loophole to get around tax, but taking a loan against assets you own should not be taxable. It's the same pathway that people use to take a loan against their property and other assets, and having to pay tax on that is absurd Similarly, stocks (or things like gold) that one owns have some worth, and using it as collateral for taking a loan against it is a completely valid thing to do

ncallaway 5y ago
Just put a reasonable threshold on it. Any assets, above $100M, used to collateralize a loan are taxed as if they are realized capital gains at the time that you collateralize the loan. I don't think the loan itself should be taxed, but if you use assets to collateralize a loan, those assets should be taxed as if they're realized income—since by taking the loan you are now "realizing" the value of those appreciating assets.
scythe 5y ago
Honestly, maybe people should pay taxes on that. Remember, it only applies to the gain in value, so loans up to the original purchase price would not be taxed. The tax is assessed based on the maximum collateralization minus the purchase price and minus any value previously taxed as a capital gain, as I understand it. In a practical sense, they have gained spending power they wouldn't have otherwise.
trhway 5y ago
>It's the same pathway that people use to take a loan against their property and other assets, and having to pay tax on that is absurd you bought house for $600K cash (for simplicity). Some years later the house appreciated to $1.5M, and you take out a $1M loan against it - you are obviously realizing a $400K of the value of the house as otherwise those additional $400K can only come from thin air. So those $400K of the realized value of the house (not the loan) need to be taxed with the house adjusted cost basis becoming $1M. If you sell the house later for $1.5M the remaining $500K would get taxed as the difference between sale proceeds and the adjusted cost basis.
WalterBright 5y ago

gfodor 5y ago

That doesn’t make any sense, presuming you meant “collateralize.” I put up $100k of stock for a $100k loan, I do nothing, turn around and pay the money back, and now I have a tax bill? If I repeat this process, I can have an infinite tax liability with no realized gain or net income. Am I missing something?

deleted 5y ago
[deleted]
yuliyp 5y ago
No, the tax bill would come with an adjustment of cost basis. The second time there's no change in value so no tax bill.
deleted 5y ago
[deleted]
awillen 5y ago
The theoretical ability to create an infinite tax liability isn't an issue because people just won't do that. Also, you only tax people in this way if they're over a certain level of net worth/income.
opportune 5y ago
The “repeating the process” is entirely the problem. If you perpetually roll over your loans you are able to spend large amounts of money without ever realizing a cent of it, thus never paying taxes (since your estate would end up paying it but then financial trickery makes the realization there non taxable). It would be easy to avoid this infinite tax liability by not taking out an infinite amount of loans…
- Anon1096 5y ago
  The problem here is with the step up in cost basis upon death, not getting loans against unrealized shares.
  - 5y ago