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Amen to that. Incidentally this is not just a crypto tax avoidance play. It's an asset-rich tax avoidance play. Do you think Bezos sells stock to buy the latest

Amen to that. Incidentally this is not just a crypto tax avoidance play. It's an asset-rich tax avoidance play. Do you think Bezos sells stock to buy the latest mega-yacht? Of course not. He'd realise a substantial capital gain. Instead he borrows against his stock. No capital gain = no CGT.

rsj_hn 5y ago
I really wish people would think systematically about these issues before jumping on their soapbox, as this strategy does not eliminate tax payment, it merely defers it, with some interest cost. Consider the following scenario: Say the interest rate for a wealthy individual like Bezos is 1% per period. Case A: Bezos sells $100 of stock. He pays 20% and consumes $80. NPV of tax liability is $20. Case B: Bezos borrow borrows $80 to spend in a period and then at the end of the period sells $101 of stock to pay back the loan and (and pay taxes on it). Thus his tax liability at the end of the period is .20*101, which in present value terms = .20*100 = $20. Exactly the same amount of taxes he would have paid if he didn't borrow. Case C: Bezos sells only $80 of stock and then borrows $16 to pay his taxes, ending with a debt of $16.16 at the end of the period, and he will need to sell $20.2 in stock to extinguish his total liability ($16.16 due the bank and also the $4.04 in taxes on the sale), which in present value terms is the same payment as before, namely $20. The real reason people like Bezos borrow to pay their taxes is because the interest rate charged to them by the bank is less the growth rate of their assets. Therefore they are acting like a bank, borrowing at one rate and investing at another rate, making money on the spread. Thus keeping the stock is worth more to Bezos than borrowing to pay the tax, which is effectively what is happening. At least, this is what they believe. Of course this type of balance sheet expansion comes with risk - risk that they bear that if the stock price falls, they will end up paying much more than if they hadn't levered up and borrowed to pay their taxes. But that's a risk they are willing to take. So you don't need to pull your hair out worrying that Bezos is not paying taxes. He is effectively borrowing to pay taxes so that he ends up with a bigger payment down the road, which in present value terms is the same tax liability as if he didn't borrow. The treasury will receive not only all the tax money as if Bezos never borrowed, but all the tax money with interest, namely whatever interest Bezos needs to pay. However Bezos is betting that the growth rate of his assets is even higher. So now you understand why everyone is borrowing to pay taxes -- because interests are so low. So thank the Fed that this type of arbitrage is possible. It's not tax arbitrage, it's interest rate arbitrage.
- sokoloff 5y ago
  I find amusing that the same people (from my perspective) will argue that Roth savings vehicles are terrible because the government gets its $20 now and then all this growth happens untaxed and the government never gets its cut of that 40 years from now. “Uh, you did, back on the first day, remember?”
- int_19h 5y ago
  You forgot to mention that if Bezos holds shares until he dies, the people who inherit them will not pay capital gains tax on them even if they do cash out. And the treasury will not get anything in that scenario.
  - rsj_hn 5y ago
    I didn't mention it because it's not true. I am amazed you think collateralized loans are just forgiven when someone dies. Remember that these are personal loans to Bezos. If they were loans to some business entity Bezos created, then whatever payment he received from that entity would be taxable income. The debts will need to be paid to the banks as part of the settlement process of Bezos' personal assets, which will require asset sales, and these sales will incur a tax liability and all of the above calculations will take effect.
    - patentatt 5y ago
      And don’t you think that the bankers and heirs wouldn’t simply agree to have the heirs pay the loans back after they inherit the assets? Why wouldn’t they? I’d even assume it’s written into the loan documents or maybe even through the individuals will or something. And why wouldn’t an heir agree to that? By paying the loan after inheriting the assets the heirs will get to keep the capital gains. “Hey Bezos Jr., do you want to inherit 20% more money, or 20% less? Because all we have to do is sign this stack of papers in a different order to avoid all capital gains.” Or even simpler still is just to pay the loans back with the assets directly. Or any other number of maneuvers to make sure the bankers are happy and simply call the debt settled. There’s myriad ways of doing this, and I’m absolutely 100% sure that the billionaires and their ‘family offices’ of likely dozens or hundreds of highly skilled accountants and attorneys haven’t figured out some way out of this.

rsj_hn 5y ago

I really wish people would think systematically about these issues before jumping on their soapbox, as this strategy does not eliminate tax payment, it merely defers it, with some interest cost. Consider the following scenario: Say the interest rate for a wealthy individual like Bezos is 1% per period. Case A: Bezos sells $100 of stock. He pays 20% and consumes $80. NPV of tax liability is $20. Case B: Bezos borrow borrows $80 to spend in a period and then at the end of the period sells $101 of stock to pay back the loan and (and pay taxes on it). Thus his tax liability at the end of the period is .20*101, which in present value terms = .20*100 = $20. Exactly the same amount of taxes he would have paid if he didn't borrow. Case C: Bezos sells only $80 of stock and then borrows $16 to pay his taxes, ending with a debt of $16.16 at the end of the period, and he will need to sell $20.2 in stock to extinguish his total liability ($16.16 due the bank and also the $4.04 in taxes on the sale), which in present value terms is the same payment as before, namely $20. The real reason people like Bezos borrow to pay their taxes is because the interest rate charged to them by the bank is less the growth rate of their assets. Therefore they are acting like a bank, borrowing at one rate and investing at another rate, making money on the spread. Thus keeping the stock is worth more to Bezos than borrowing to pay the tax, which is effectively what is happening. At least, this is what they believe. Of course this type of balance sheet expansion comes with risk - risk that they bear that if the stock price falls, they will end up paying much more than if they hadn't levered up and borrowed to pay their taxes. But that's a risk they are willing to take. So you don't need to pull your hair out worrying that Bezos is not paying taxes. He is effectively borrowing to pay taxes so that he ends up with a bigger payment down the road, which in present value terms is the same tax liability as if he didn't borrow. The treasury will receive not only all the tax money as if Bezos never borrowed, but all the tax money with interest, namely whatever interest Bezos needs to pay. However Bezos is betting that the growth rate of his assets is even higher. So now you understand why everyone is borrowing to pay taxes -- because interests are so low. So thank the Fed that this type of arbitrage is possible. It's not tax arbitrage, it's interest rate arbitrage.

sokoloff 5y ago
I find amusing that the same people (from my perspective) will argue that Roth savings vehicles are terrible because the government gets its $20 now and then all this growth happens untaxed and the government never gets its cut of that 40 years from now. “Uh, you did, back on the first day, remember?”
int_19h 5y ago
You forgot to mention that if Bezos holds shares until he dies, the people who inherit them will not pay capital gains tax on them even if they do cash out. And the treasury will not get anything in that scenario.
- rsj_hn 5y ago
  I didn't mention it because it's not true. I am amazed you think collateralized loans are just forgiven when someone dies. Remember that these are personal loans to Bezos. If they were loans to some business entity Bezos created, then whatever payment he received from that entity would be taxable income. The debts will need to be paid to the banks as part of the settlement process of Bezos' personal assets, which will require asset sales, and these sales will incur a tax liability and all of the above calculations will take effect.
  - patentatt 5y ago
    And don’t you think that the bankers and heirs wouldn’t simply agree to have the heirs pay the loans back after they inherit the assets? Why wouldn’t they? I’d even assume it’s written into the loan documents or maybe even through the individuals will or something. And why wouldn’t an heir agree to that? By paying the loan after inheriting the assets the heirs will get to keep the capital gains. “Hey Bezos Jr., do you want to inherit 20% more money, or 20% less? Because all we have to do is sign this stack of papers in a different order to avoid all capital gains.” Or even simpler still is just to pay the loans back with the assets directly. Or any other number of maneuvers to make sure the bankers are happy and simply call the debt settled. There’s myriad ways of doing this, and I’m absolutely 100% sure that the billionaires and their ‘family offices’ of likely dozens or hundreds of highly skilled accountants and attorneys haven’t figured out some way out of this.