4 ms·

Doesn't this "close" the tax loophole in which holders of tradable assets can take out loans against those assets in perpetuity, never paying taxes on any of it

by zelias 2y ago

Doesn't this "close" the tax loophole in which holders of tradable assets can take out loans against those assets in perpetuity, never paying taxes on any of it?

nightski 2y ago
I mean, you have to pay the loans back. Which requires income which is taxed. This would only work if you either don't spend any money (which then what is the point of the loan) or if your assets are always going up and increasing in value beyond that of the loan which inevitably will not be the case.
- fooker 2y ago
  > Which requires income which is taxed And there lies the loophole. These loans are often structured as some kind of business expense that can be paid from pre-tax income. So, ultra rich people get to double dip here. No taxes on selling stocks for money, as there's a loan, plus no taxes on the income for paying it off.
  - nightski 2y ago
    That's not a loophole, it is illegal. You can't deduct personal expenses from a business. I realize the rich do it, but if that is the problem let's go after that. Also if you sell stocks you always pay tax on the capital gains regardless if there is a loan or not.
    - fooker 2y ago
      >You can't deduct personal expenses from a business. I realize the rich do it, but if that is the problem let's go after that. We have gone 'after it' again and again, making the system more and more complex. So much that you can now out-lawyer the IRS if you have enough money. There is no 'personal' expense, everything is somehow a business need. There is no simple solution to this really. Whatever you do to hurt ten billionaires, the ten million small business owners will face the brunt of it. >Also if you sell stocks you always pay tax on the capital gains regardless if there is a loan or not. That is the point, you don't sell stocks that makes you a billionaire. Instead, you find more and more creative ways to leverage that stock for loans, for deals, for power/control, etc etc. Also see cross collaterals where the same asset is used for multiple purposes at the same time!
      - nightski 2y ago
        So if you argue that we already can't enforce existing tax laws then why is proposing new, extremely expensive and difficult to enforce tax laws the solution?
        fooker 2y ago
        It's not. Taxing unrealized capital gains is just going to give these people more loopholes to play with. But "tax the rich" seems to be the zeitgeist for whatever reason.
- pkaeding 2y ago
  The actual loophole is the step-up basis for inheritance. This allows you to never realize gains, living off loans against them. Then, when you die, your heirs inherit the appeciated assets, and the liabilities. But, their cost basis for the assets is stepped up to the then-current fair value. So, they can sell off assets to pay the loans off, but have no realized gains.
  - ensignavenger 2y ago
    But charging taxes on the loan won't really reflect that well. Also, there are limits on inheritance before estate tax kicks in, so folks with 100's of million in assets passed on to their heirs are still paying estate tax, it won't be tax free at that level. (Edited to correct "inheritance tax" to the technically correct term, "estate tax")
  - aetherson 2y ago
    However, there is the estate tax. If you're a billionaire who does the "take out loans against your unrealized cap gains" trick, then you, you know... can't sell your stock. So then your stock passes to your kids -- who, due to the stepped up basis, yes, do not have to pay cap gains on that stock. But there's a 40% estate tax. Estate tax generally isn't very relevant even to the ordinarily-rich, because it has an extremely high deduction (about $27M for a married couple), but for a billionaire it's absolutely relevant. Now, sure, if you paid both the cap gains and the estate tax you'd pay that much more taxes, but if you compare a normally-wealthy person (pays 15-20% cap gains and 0% estate tax) and a billionaire (pays 0% cap gains and 40% estate tax), it's obvious that the billionaire, eventually, pays a much higher tax rate.
    - pkaeding 2y ago
      Right. In my opinion, the 'fair' and 'simple' thing to do would be to eliminate the estate tax, and the step-up basis. Then there would be no loop hole to borrow against unrealized gains (and no real point to do so), while still allowing wealth to be enjoyed by the family that generated it, requiring them to pay taxes in the same way everyone else does (simplifying the tax code).
_heimdall 2y ago
Not necessarily, though that is the hope. This wouldn't directly close the loophole, its meant to be attempt to block it without actually closing it. A huge question I have here is how unrealized gains on nonfinancial assets would be handles. How would the government determine the fair market value of a multimillion dollar mansion, for example? More broadly, how would we justify only taxing unrealized gains on individuals? Or would this apply to corporations, banks, and financial institutions as well? My point isn't actually any specific issue in the proposal, these are just examples of what could be a problem. Our tax code is massive and incomprehensible to almost everyone. Adding further caveats and stipulations just makes it worse. Taking an axe to much of the tax code seems like a much more reasonable approach in my book.
- spacemanspiff01 2y ago
  With regards to the mansion, doesn't the (state) government already do that with property taxes?
  - _heimdall 2y ago
    In my experience, state property tax assessments do a decent job at trying to calculate relative values but a terrible job at defining actual property values. Meaning, they may pretty reliably value my house at 10 or 15% less than the house next door based on age or size, but the actual value they put on either house isn't even close to what it would sell for (I've always seen tax assessments come in much lower than market rate). I don't know how that plays out with mansions though. Whether a mansion is worth $30M or $10M is often hard to predict with the pool of potential buyers being so low.
  - ensignavenger 2y ago
    Property tax assessments are rarely fair market value. They are at best a very gross approximation. But yes, a tax on "unrealized gains" basically amounts to a property tax, not anything related to an income tax.
    - _heimdall 2y ago
marcuskane2 2y ago
I'm pretty sure that whole notion of these magical loans to avoid taxes is a made up internet conspiracy theory. A) Loans need to be paid back, with interest. The person must either be selling assets or drawing in other (taxed) income to pay back the loan. A loan could delays the taxes to a future year to let someone buy a house or yacht or whatever without the full tax burden in year 1, but they still ultimately pay all the taxes B) If they die while still having outstanding loans, their heirs pay a 40% inheritance tax on everything above like 10 million, so there is no magic avoidance of taxes there, just a change in whether it's capital gains tax today or inheritance tax tomorrow. I'd love to be disproven if someone can explain a real tax loophole, but as far as I can tell, the "Billionaires avoid taxes by taking out loans" thing is completely untrue.
- tboettch 2y ago
  If I'm reading the IRS data[1] correctly, "debts and mortgages" are considered a deduction on the estate valuation, which means any money left in the estate (i.e. instead of in a trust) solely to cover loans would not be taxed. I think the idea is that you would roll the debts until death, at which point the estate can sell the securities with their stepped up cost basis, thereby avoiding (nearly all) capital gains tax. I'm not an expert on this, and I could be misunderstanding some subtlety here. [1] https://www.irs.gov/statistics/soi-tax-stats-estate-tax-filing-year-tables https://www.irs.gov/statistics/soi-tax-stats-estate-tax-fili...

by zelias 2y ago

Doesn't this "close" the tax loophole in which holders of tradable assets can take out loans against those assets in perpetuity, never paying taxes on any of it?

nightski 2y ago

I mean, you have to pay the loans back. Which requires income which is taxed. This would only work if you either don't spend any money (which then what is the point of the loan) or if your assets are always going up and increasing in value beyond that of the loan which inevitably will not be the case.

fooker 2y ago
> Which requires income which is taxed And there lies the loophole. These loans are often structured as some kind of business expense that can be paid from pre-tax income. So, ultra rich people get to double dip here. No taxes on selling stocks for money, as there's a loan, plus no taxes on the income for paying it off.
- nightski 2y ago
  That's not a loophole, it is illegal. You can't deduct personal expenses from a business. I realize the rich do it, but if that is the problem let's go after that. Also if you sell stocks you always pay tax on the capital gains regardless if there is a loan or not.
  - fooker 2y ago
    >You can't deduct personal expenses from a business. I realize the rich do it, but if that is the problem let's go after that. We have gone 'after it' again and again, making the system more and more complex. So much that you can now out-lawyer the IRS if you have enough money. There is no 'personal' expense, everything is somehow a business need. There is no simple solution to this really. Whatever you do to hurt ten billionaires, the ten million small business owners will face the brunt of it. >Also if you sell stocks you always pay tax on the capital gains regardless if there is a loan or not. That is the point, you don't sell stocks that makes you a billionaire. Instead, you find more and more creative ways to leverage that stock for loans, for deals, for power/control, etc etc. Also see cross collaterals where the same asset is used for multiple purposes at the same time!
    - nightski 2y ago
      So if you argue that we already can't enforce existing tax laws then why is proposing new, extremely expensive and difficult to enforce tax laws the solution?
      - fooker 2y ago
        It's not. Taxing unrealized capital gains is just going to give these people more loopholes to play with. But "tax the rich" seems to be the zeitgeist for whatever reason.
pkaeding 2y ago
The actual loophole is the step-up basis for inheritance. This allows you to never realize gains, living off loans against them. Then, when you die, your heirs inherit the appeciated assets, and the liabilities. But, their cost basis for the assets is stepped up to the then-current fair value. So, they can sell off assets to pay the loans off, but have no realized gains.
- ensignavenger 2y ago
  But charging taxes on the loan won't really reflect that well. Also, there are limits on inheritance before estate tax kicks in, so folks with 100's of million in assets passed on to their heirs are still paying estate tax, it won't be tax free at that level. (Edited to correct "inheritance tax" to the technically correct term, "estate tax")
- aetherson 2y ago
  However, there is the estate tax. If you're a billionaire who does the "take out loans against your unrealized cap gains" trick, then you, you know... can't sell your stock. So then your stock passes to your kids -- who, due to the stepped up basis, yes, do not have to pay cap gains on that stock. But there's a 40% estate tax. Estate tax generally isn't very relevant even to the ordinarily-rich, because it has an extremely high deduction (about $27M for a married couple), but for a billionaire it's absolutely relevant. Now, sure, if you paid both the cap gains and the estate tax you'd pay that much more taxes, but if you compare a normally-wealthy person (pays 15-20% cap gains and 0% estate tax) and a billionaire (pays 0% cap gains and 40% estate tax), it's obvious that the billionaire, eventually, pays a much higher tax rate.
  - pkaeding 2y ago
    Right. In my opinion, the 'fair' and 'simple' thing to do would be to eliminate the estate tax, and the step-up basis. Then there would be no loop hole to borrow against unrealized gains (and no real point to do so), while still allowing wealth to be enjoyed by the family that generated it, requiring them to pay taxes in the same way everyone else does (simplifying the tax code).

_heimdall 2y ago

Not necessarily, though that is the hope. This wouldn't directly close the loophole, its meant to be attempt to block it without actually closing it. A huge question I have here is how unrealized gains on nonfinancial assets would be handles. How would the government determine the fair market value of a multimillion dollar mansion, for example? More broadly, how would we justify only taxing unrealized gains on individuals? Or would this apply to corporations, banks, and financial institutions as well? My point isn't actually any specific issue in the proposal, these are just examples of what could be a problem. Our tax code is massive and incomprehensible to almost everyone. Adding further caveats and stipulations just makes it worse. Taking an axe to much of the tax code seems like a much more reasonable approach in my book.

spacemanspiff01 2y ago
With regards to the mansion, doesn't the (state) government already do that with property taxes?
- _heimdall 2y ago
  In my experience, state property tax assessments do a decent job at trying to calculate relative values but a terrible job at defining actual property values. Meaning, they may pretty reliably value my house at 10 or 15% less than the house next door based on age or size, but the actual value they put on either house isn't even close to what it would sell for (I've always seen tax assessments come in much lower than market rate). I don't know how that plays out with mansions though. Whether a mansion is worth $30M or $10M is often hard to predict with the pool of potential buyers being so low.
- ensignavenger 2y ago
  Property tax assessments are rarely fair market value. They are at best a very gross approximation. But yes, a tax on "unrealized gains" basically amounts to a property tax, not anything related to an income tax.
  - _heimdall 2y ago

marcuskane2 2y ago

I'm pretty sure that whole notion of these magical loans to avoid taxes is a made up internet conspiracy theory. A) Loans need to be paid back, with interest. The person must either be selling assets or drawing in other (taxed) income to pay back the loan. A loan could delays the taxes to a future year to let someone buy a house or yacht or whatever without the full tax burden in year 1, but they still ultimately pay all the taxes B) If they die while still having outstanding loans, their heirs pay a 40% inheritance tax on everything above like 10 million, so there is no magic avoidance of taxes there, just a change in whether it's capital gains tax today or inheritance tax tomorrow. I'd love to be disproven if someone can explain a real tax loophole, but as far as I can tell, the "Billionaires avoid taxes by taking out loans" thing is completely untrue.

tboettch 2y ago
If I'm reading the IRS data[1] correctly, "debts and mortgages" are considered a deduction on the estate valuation, which means any money left in the estate (i.e. instead of in a trust) solely to cover loans would not be taxed. I think the idea is that you would roll the debts until death, at which point the estate can sell the securities with their stepped up cost basis, thereby avoiding (nearly all) capital gains tax. I'm not an expert on this, and I could be misunderstanding some subtlety here. [1] https://www.irs.gov/statistics/soi-tax-stats-estate-tax-filing-year-tables https://www.irs.gov/statistics/soi-tax-stats-estate-tax-fili...