6 ms·

If you can take loans using unrealized gains as collateral, then you should also pay taxes for them.

haneefmubarak 3y ago
At some point such loans will have to be paid back and tax will be paid. Alternatively, we could require that the capital gains on an asset used to collateralize a loan be taxed at that point.
- monocasa 3y ago
  Unless you just don't, carry them across death when the basis is reset and pay them then.
  - alach11 3y ago
    Is there any good reason to not eliminate step-up basis on death?
    - morsch 3y ago
      Fwiw, I don't think this basis step-up thing is a thing in German tax/inheritance law.
    - megaman821 3y ago
      Apparently no one can afford the tax bill on an inherited farm, and it looks terrible forcing family farms to sell their land to a large conglomerate.
      - notyofriend 3y ago
        How many of those are really left anyway but yeah the pr is bad
      - alach11 3y ago
        It still doesn't make sense to me. If I inherit a farm or other asset, I don't owe capital gains until I sell it right? If the basis remained the same, it's not like I suffer in any way upon inheritance.
        megaman821 3y ago
        I am not a tax expert, but I am pretty sure a change of ownership (minus the exempt amount) is a taxable event.
monocasa 3y ago
I personally think the best option is that rather than taxing all unrealized gains, treat using them as collateral as as much a realization event as cashing them out. Would cut this loophole out of the equation. Normal unrealized gains are hard to put a real value on. Unrealized gains used as collateral just had you and a bank agreeing that there's something real and dependable there.
- Terr_ 3y ago
  > treat using them as collateral as as much a realization event as cashing them out I anticipate this scenario: "Hey, tax-dude, you know that $50,000 of Amazon stock I bought back in 2009? Well, I just used it as collateral to borrow some cash from my buddy, which I'm told I need to inform you about. He stared real hard at the stockamajigs said it was worth $50,000, and lent me that same amount. So anyway--major bummer here--it turns out I made zero profit on that pointless investment, which by-the-way means don't owe any kind of capital-gains tax at all."
  - monocasa 3y ago
    > Well, I just used it as collateral to borrow some cash from my buddy, which I'm told I need to inform you about. I'm suggesting that's the realization event. That $50,000 is taxed as capital gains at that point. The subsequent loan value is immaterial to income calculations just like all other loans.
    - Terr_ 3y ago
      Then it's not really about investments, but about loans becoming income, which would be a huge change.
      - monocasa 3y ago
        The loan itself is orthogonal. Using them as collateral would just reset basis to the value appraised with taxes due on the difference between that and the original basis, just like any other realization event. From a tax perspective it'd be like if you sold and immediately rebought the stock or whatever.
charlieyu1 3y ago
What if the counterparty fails to pay for your unrealized gains?
- whatever1 3y ago
  Tax credit
mise_en_place 3y ago
Then they’ll make sure their unrealized gains are <= 0. Not terribly hard, Wealthfront does tax loss harvesting, as do many broker-dealers and asset managers.
novok 3y ago
They would need to allow a lot of other refunds if that really does start becoming the case. Ex: All capital loss should also be deductible against regular income, carryover capital loss over the years should get interest from the government much like tax you don't pay gets interest on you, etc. If that sounds crazy, it is, but it also makes something as crazy as tax on unrealized unliquid gains you cannot sell too somewhat possible. Many, many new businesses that are growing would essentially have to be liquidated to the government in a few years.
- WkndTriathlete 3y ago
  Well, capital loss carryover needs an inflation index in a bad way anyway. It was introduced into the tax code 45 years ago and it hasn't changed since. There was a proposal a year ago to bump it to $13,000 and index it to inflation but apparently did not get the necessary votes.
  - notyofriend 3y ago
    Loss carry over system is messed up right not definitely needed
sytelus 3y ago
No, you should not. Taking loan is very different than paying taxes. If you house goes up in value by 10% every year, you shouldn't have to pony up that much tax each year. But you should be able t take loan against your house because it's a commitment for returning that money. Imagine, I have $1000 unrealized gain in year1. Next year market tanks and I now have -$2000 in year2. Year after that market goes backup and now I have $0 gain in year3. If I hadn't sold my investment for 3 years, I have net gain $0 and I should pay $0 tax. However, taxing unrealized gains means I will have to pay tax on additional $1000 that I never had.
- lotsofpulp 3y ago
  > If you house goes up in value by 10% every year, you shouldn't have to pony up that much tax each year. Why not? Obviously not 100% of the unrealized gain, but in most jurisdictions property tax (a subset of wealth tax) is a percentage of the market value (or some proxy) of the house. And while people might think that they are not receiving government services just for owning land, they would be wrong. Owning land means nothing if you cannot defend it, or you cannot pay someone else to defend it for you. All those courts/lawyers/police/military cost money, as well as other government services necessary to maintain social order. If anything, the current situation of income taxes making up most of government revenue means that people who work are disproportionately paying for expenses that disproportionately benefit people who own. > However, taxing unrealized gains means I will have to pay tax on additional $1000 that I never had. But would you say you derived a benefit from a society that allowed you to maintain title to something peacefully? Because that mechanism is not free.
  - novok 3y ago
    At current income tax levels, if we go to an indirect 'wealth' tax route via unrealized gains, would need to decrease significantly to be viable without being forced to effectively liquidate your business within a couple of years to the government. Imagine if property tax was %10-50 of your property value vs. the %0.5-%2 it is today. Nobody would own their properties anymore in a span or a year or two. Unrealized gain tax would create a huge industry trying to put valuations on random restaurants and car dealerships, and the market for small businesses like that are very illiquid, so they will get detached from reality fairly fast.
ffgjgf1 3y ago
So same should apply to mortgages and real estate?
roenxi 3y ago
Tax isn't some game where the goal is to maximise the take. Those unrealised gains are literally money that went into some of the most productive capital formation projects that people know about. The US is currently suffering from an investment crisis where a generation of capital was built in Asia instead of on US shores. It'd be wildly foolish to start penalising the enterprises that are left. Look at US spending and note that the money goes towards (1) the wealth bonfire of permanent war and (2) a large and complex welfare state split between health care, pensions and other services. Neither of those are capital formation (the wars are in fact capital destruction). Everyone will get better outcomes if the money that goes to capital formation is protected from tax because the benefits of capital are substantially higher than the benefits of consumption spending. Literally the only thing keeping our standards above a typical baboon's is that capital being built. The real problem here is pretending things that are capital destructive are valuable - the 2007 crisis response bailing out bankrupt banks springs to mind and the ongoing cover to various unprofitable businesses with the low interest rate regime so people can get wealthy while not building anything useful. But randomly taking money from people making unrealised capital gains doesn't fix that, and it just puts more money into the pot that funds the war machine.
Ferret7446 3y ago
Why? Loans are not (only) given by the government. I should be free to loan money based on whatever collateral I want. If I want to loan money with my friend's prized guitar as collateral, how does that mean that the government should tax my friend's guitar?
tim333 3y ago
This article I think is not about that. It's about when say Apple Ireland has made billions but not sent them to Apple USA which owns the subsidiary. There are a lot of problems with taxing unrealised gains. Say you paint a picture for fun, I say that's brilliant it's probably worth $1m, do you then have to try to borrow $200k to send to the tax man? And many similar more mudande situations along those lines.
tomp 3y ago
Do you get taxes back if you lose money?
- henriquez 3y ago
  Hahahaha, good one! You can lose an unlimited amount of money and then deduct up to a maximum $3,000 a year, if you use itemized deductions. Thanks for playing.
  - quickthrowman 3y ago
    You can claim the $3,000 in capital losses while taking the standard deduction. Don’t ask me how I know ;)
georgehm 3y ago
Why? Here the asset used as collateral is a commitment to return the money if the loan isn’t repaid. Imagine I bought gold back when gold was 100$ , it’s current price is 1000$ and now I use it as collateral to get a loan . How is it fair that I have to pay taxes on 900$ of unrealized gains ?
- notyofriend 3y ago
  By using as collateral you realized the gains because they became tangible and usable.
  - georgehm 3y ago
    No they didn’t because until the loan is repaid you can’t use whatever gold you put up for other purposes can you. What became tangible is what you used the loan for , that is what can be taxed.
  - fxd123 3y ago
    Collateral is explicitly not tangible and usable. The whole point of collateral is that the unrealized gains are held in a illiquid limbo
voldacar 3y ago
Why? Because you say so?

At some point such loans will have to be paid back and tax will be paid. Alternatively, we could require that the capital gains on an asset used to collateralize a loan be taxed at that point.

monocasa 3y ago
Unless you just don't, carry them across death when the basis is reset and pay them then.
- alach11 3y ago
  Is there any good reason to not eliminate step-up basis on death?
  - morsch 3y ago
    Fwiw, I don't think this basis step-up thing is a thing in German tax/inheritance law.
  - megaman821 3y ago
    Apparently no one can afford the tax bill on an inherited farm, and it looks terrible forcing family farms to sell their land to a large conglomerate.
    - notyofriend 3y ago
      How many of those are really left anyway but yeah the pr is bad
    - alach11 3y ago
      It still doesn't make sense to me. If I inherit a farm or other asset, I don't owe capital gains until I sell it right? If the basis remained the same, it's not like I suffer in any way upon inheritance.
      - megaman821 3y ago
        I am not a tax expert, but I am pretty sure a change of ownership (minus the exempt amount) is a taxable event.

monocasa 3y ago

I personally think the best option is that rather than taxing all unrealized gains, treat using them as collateral as as much a realization event as cashing them out. Would cut this loophole out of the equation. Normal unrealized gains are hard to put a real value on. Unrealized gains used as collateral just had you and a bank agreeing that there's something real and dependable there.

Terr_ 3y ago
> treat using them as collateral as as much a realization event as cashing them out I anticipate this scenario: "Hey, tax-dude, you know that $50,000 of Amazon stock I bought back in 2009? Well, I just used it as collateral to borrow some cash from my buddy, which I'm told I need to inform you about. He stared real hard at the stockamajigs said it was worth $50,000, and lent me that same amount. So anyway--major bummer here--it turns out I made zero profit on that pointless investment, which by-the-way means don't owe any kind of capital-gains tax at all."
- monocasa 3y ago
  > Well, I just used it as collateral to borrow some cash from my buddy, which I'm told I need to inform you about. I'm suggesting that's the realization event. That $50,000 is taxed as capital gains at that point. The subsequent loan value is immaterial to income calculations just like all other loans.
  - Terr_ 3y ago
    Then it's not really about investments, but about loans becoming income, which would be a huge change.
    - monocasa 3y ago
      The loan itself is orthogonal. Using them as collateral would just reset basis to the value appraised with taxes due on the difference between that and the original basis, just like any other realization event. From a tax perspective it'd be like if you sold and immediately rebought the stock or whatever.

charlieyu1 3y ago

What if the counterparty fails to pay for your unrealized gains?

whatever1 3y ago
Tax credit

mise_en_place 3y ago

Then they’ll make sure their unrealized gains are <= 0. Not terribly hard, Wealthfront does tax loss harvesting, as do many broker-dealers and asset managers.

novok 3y ago

They would need to allow a lot of other refunds if that really does start becoming the case. Ex: All capital loss should also be deductible against regular income, carryover capital loss over the years should get interest from the government much like tax you don't pay gets interest on you, etc. If that sounds crazy, it is, but it also makes something as crazy as tax on unrealized unliquid gains you cannot sell too somewhat possible. Many, many new businesses that are growing would essentially have to be liquidated to the government in a few years.

WkndTriathlete 3y ago
Well, capital loss carryover needs an inflation index in a bad way anyway. It was introduced into the tax code 45 years ago and it hasn't changed since. There was a proposal a year ago to bump it to $13,000 and index it to inflation but apparently did not get the necessary votes.
- notyofriend 3y ago
  Loss carry over system is messed up right not definitely needed

sytelus 3y ago

No, you should not. Taking loan is very different than paying taxes. If you house goes up in value by 10% every year, you shouldn't have to pony up that much tax each year. But you should be able t take loan against your house because it's a commitment for returning that money. Imagine, I have $1000 unrealized gain in year1. Next year market tanks and I now have -$2000 in year2. Year after that market goes backup and now I have $0 gain in year3. If I hadn't sold my investment for 3 years, I have net gain $0 and I should pay $0 tax. However, taxing unrealized gains means I will have to pay tax on additional $1000 that I never had.

lotsofpulp 3y ago
> If you house goes up in value by 10% every year, you shouldn't have to pony up that much tax each year. Why not? Obviously not 100% of the unrealized gain, but in most jurisdictions property tax (a subset of wealth tax) is a percentage of the market value (or some proxy) of the house. And while people might think that they are not receiving government services just for owning land, they would be wrong. Owning land means nothing if you cannot defend it, or you cannot pay someone else to defend it for you. All those courts/lawyers/police/military cost money, as well as other government services necessary to maintain social order. If anything, the current situation of income taxes making up most of government revenue means that people who work are disproportionately paying for expenses that disproportionately benefit people who own. > However, taxing unrealized gains means I will have to pay tax on additional $1000 that I never had. But would you say you derived a benefit from a society that allowed you to maintain title to something peacefully? Because that mechanism is not free.
- novok 3y ago
  At current income tax levels, if we go to an indirect 'wealth' tax route via unrealized gains, would need to decrease significantly to be viable without being forced to effectively liquidate your business within a couple of years to the government. Imagine if property tax was %10-50 of your property value vs. the %0.5-%2 it is today. Nobody would own their properties anymore in a span or a year or two. Unrealized gain tax would create a huge industry trying to put valuations on random restaurants and car dealerships, and the market for small businesses like that are very illiquid, so they will get detached from reality fairly fast.

ffgjgf1 3y ago

So same should apply to mortgages and real estate?

roenxi 3y ago

Tax isn't some game where the goal is to maximise the take. Those unrealised gains are literally money that went into some of the most productive capital formation projects that people know about. The US is currently suffering from an investment crisis where a generation of capital was built in Asia instead of on US shores. It'd be wildly foolish to start penalising the enterprises that are left. Look at US spending and note that the money goes towards (1) the wealth bonfire of permanent war and (2) a large and complex welfare state split between health care, pensions and other services. Neither of those are capital formation (the wars are in fact capital destruction). Everyone will get better outcomes if the money that goes to capital formation is protected from tax because the benefits of capital are substantially higher than the benefits of consumption spending. Literally the only thing keeping our standards above a typical baboon's is that capital being built. The real problem here is pretending things that are capital destructive are valuable - the 2007 crisis response bailing out bankrupt banks springs to mind and the ongoing cover to various unprofitable businesses with the low interest rate regime so people can get wealthy while not building anything useful. But randomly taking money from people making unrealised capital gains doesn't fix that, and it just puts more money into the pot that funds the war machine.

Ferret7446 3y ago

Why? Loans are not (only) given by the government. I should be free to loan money based on whatever collateral I want. If I want to loan money with my friend's prized guitar as collateral, how does that mean that the government should tax my friend's guitar?

tim333 3y ago

This article I think is not about that. It's about when say Apple Ireland has made billions but not sent them to Apple USA which owns the subsidiary. There are a lot of problems with taxing unrealised gains. Say you paint a picture for fun, I say that's brilliant it's probably worth $1m, do you then have to try to borrow $200k to send to the tax man? And many similar more mudande situations along those lines.

tomp 3y ago

Do you get taxes back if you lose money?

henriquez 3y ago
Hahahaha, good one! You can lose an unlimited amount of money and then deduct up to a maximum $3,000 a year, if you use itemized deductions. Thanks for playing.
- quickthrowman 3y ago
  You can claim the $3,000 in capital losses while taking the standard deduction. Don’t ask me how I know ;)

georgehm 3y ago

Why? Here the asset used as collateral is a commitment to return the money if the loan isn’t repaid. Imagine I bought gold back when gold was 100$ , it’s current price is 1000$ and now I use it as collateral to get a loan . How is it fair that I have to pay taxes on 900$ of unrealized gains ?

notyofriend 3y ago
By using as collateral you realized the gains because they became tangible and usable.
- georgehm 3y ago
  No they didn’t because until the loan is repaid you can’t use whatever gold you put up for other purposes can you. What became tangible is what you used the loan for , that is what can be taxed.
- fxd123 3y ago
  Collateral is explicitly not tangible and usable. The whole point of collateral is that the unrealized gains are held in a illiquid limbo

voldacar 3y ago

Why? Because you say so?