4 ms·

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 the

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.
- rrrrrrrrrrrryan 3y ago
  That stock would be worth $150 million today. Why would someone worth that much money want a $50k loan, and put up 150 million dollars of assets as collateral to avoid paying taxes on the loan? If they miss a payment they lose everything. Adjusting the numbers to normal human scale, it'd be like someone putting up their $1 million house as collateral, to secure a loan for 300 bucks, so that they can skirt 100 bucks in taxes.
  - Terr_ 3y ago
    Yes, I know, the absurdly low valuation is the entire point, I'm illustrating a potential way to abuse the new rule. > If they miss a payment A non-issue since they will immediately repay the loan, and the lender is obviously complicit in the scheme. > Why would someone It's not about skipping taxes on the $50k loan, it's about skipping taxes on the $150,000k-ish investment by using and artificial valuation.
    - monocasa 3y ago
      I mean, you just had a basis reset. If the asset is later sold, you still have taxes on that 150M - 50k difference defined from the basis set by the appraisal. It's like if you sold and immediately re-bought them from a capital gains perspective.
    - rrrrrrrrrrrryan 3y ago
      If you have $150m of Amazon stock and you want to buy a mansion, you have to either sell the stock and pay taxes, or you can take out a loan and use the Amazon stock as collateral to get super favorable terms. A $50k loan won't buy you your mansion, nor will it help you avoid any taxes when you do try to realize some of the value of your Amazon stock. The point is that if you and a bank jointly agree the asset has appreciated in value, and you give the bank a claim on that asset in order to be approved for a big loan, this collateralization activity should be treated as a taxable event in the same way that a sale is, because both activities are different ways of realizing the gains.
- WkndTriathlete 3y ago
  I'm pretty sure the IRS has rules for appraisal of assets to prevent exactly this kind of thing from happening.
rrrrrrrrrrrryan 3y ago
When you collateralize an asset at an appreciated valuation, we're not even talking about about unrealized gains. The gains are literally realized through the collateralization process. The only reason it's not treated as a taxable event is because (arguably) ownership is not transferred, and the folks in power like the loophole. I say "arguably" because the process gives another party a claim against the asset, which means you no longer own it in the same way. You're no longer free to use or dispose of it as you wish.
friend_and_foe 3y ago
It's not really a loophole. Either you have to pay the debt back by selling a portion of the asset, at which time you're assessed a capital gains tax, or you have to earn the money elsewhere at which you're assessed an income or capital gains tax. Either way, taxes are paid on the loan, they're just deferred.
- monocasa 3y ago
  Except for all of the events that reset basis, like death.
  - friend_and_foe 3y ago
    That's what estate taxes are for, no?
    - monocasa 3y ago
      They're orthogonal; regular income that's been taxed is subject to an estate tax.

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.
rrrrrrrrrrrryan 3y ago
That stock would be worth $150 million today. Why would someone worth that much money want a $50k loan, and put up 150 million dollars of assets as collateral to avoid paying taxes on the loan? If they miss a payment they lose everything. Adjusting the numbers to normal human scale, it'd be like someone putting up their $1 million house as collateral, to secure a loan for 300 bucks, so that they can skirt 100 bucks in taxes.
- Terr_ 3y ago
  Yes, I know, the absurdly low valuation is the entire point, I'm illustrating a potential way to abuse the new rule. > If they miss a payment A non-issue since they will immediately repay the loan, and the lender is obviously complicit in the scheme. > Why would someone It's not about skipping taxes on the $50k loan, it's about skipping taxes on the $150,000k-ish investment by using and artificial valuation.
  - monocasa 3y ago
    I mean, you just had a basis reset. If the asset is later sold, you still have taxes on that 150M - 50k difference defined from the basis set by the appraisal. It's like if you sold and immediately re-bought them from a capital gains perspective.
  - rrrrrrrrrrrryan 3y ago
    If you have $150m of Amazon stock and you want to buy a mansion, you have to either sell the stock and pay taxes, or you can take out a loan and use the Amazon stock as collateral to get super favorable terms. A $50k loan won't buy you your mansion, nor will it help you avoid any taxes when you do try to realize some of the value of your Amazon stock. The point is that if you and a bank jointly agree the asset has appreciated in value, and you give the bank a claim on that asset in order to be approved for a big loan, this collateralization activity should be treated as a taxable event in the same way that a sale is, because both activities are different ways of realizing the gains.
WkndTriathlete 3y ago
I'm pretty sure the IRS has rules for appraisal of assets to prevent exactly this kind of thing from happening.

rrrrrrrrrrrryan 3y ago

When you collateralize an asset at an appreciated valuation, we're not even talking about about unrealized gains. The gains are literally realized through the collateralization process. The only reason it's not treated as a taxable event is because (arguably) ownership is not transferred, and the folks in power like the loophole. I say "arguably" because the process gives another party a claim against the asset, which means you no longer own it in the same way. You're no longer free to use or dispose of it as you wish.

friend_and_foe 3y ago

It's not really a loophole. Either you have to pay the debt back by selling a portion of the asset, at which time you're assessed a capital gains tax, or you have to earn the money elsewhere at which you're assessed an income or capital gains tax. Either way, taxes are paid on the loan, they're just deferred.

monocasa 3y ago
Except for all of the events that reset basis, like death.
- friend_and_foe 3y ago
  That's what estate taxes are for, no?
  - monocasa 3y ago
    They're orthogonal; regular income that's been taxed is subject to an estate tax.