5 ms·

This kind of an explanation overlooks the obvious issue: you're exposing yourself to asset valuation risk. We don't tax unrealized gains for that exact reason.

This kind of an explanation overlooks the obvious issue: you're exposing yourself to asset valuation risk. We don't tax unrealized gains for that exact reason. Let's say you have $10M in in index funds. You don't want to cash out and pay capital gains, so you get a $5M credit line with your stock as a collateral. Then, there's a market crash, your collateral is all of sudden worth just $4M, and you have a bank knocking on your door - but you already spent $5M on a McMansion. Now what? You can opt for "risk-free" assets, but then, if they're truly risk-free, they're probably not appreciating in a way that would make this tax gamble worth your time.

HDThoreaun 2y ago
The people utilizing this strategy are consuming on the order of .1% of their wealth a year. They face effectively zero risk of default or liquidation because theyre not taking a loan against half their portfolio.
- doe_eyes 2y ago
  Nah. Or rather, I don't doubt that some billionaires do, but they're not the target audience. First, not many billionaires spend time on Reddit. Second, if you're Warren Buffett and have obscene net worth but minimal living expenses, there's really no point. It doesn't matter if you're spending .1% or .125%. If you do borrow against your assets, it's usually to invest, not pay the bills. People preoccupied with strategies like that are the ones who are burning through their net worth at a much higher rate, so the difference in tax burden actually makes a difference. They're usually just wealthy enough to have a "wealth advisor". Doctors, successful techies, business owners, etc.
gen220 2y ago
Yes, people have lost a lot of wealth this way in market downturns. It’s greatly ironic: in the interest of avoiding minor taxes, they lose major assets to their bankers. It wouldn’t surprise me if the same bankers who profit in the downturn from the margin calls are the ones who sold their clients on the strategy. Any time you go into debt you need to make sure you have a margin of safety. It’s an instrument of some value but it’s a sharp blade to be wielded carefully.
throwaway22032 2y ago
You don't take out 50% to buy another asset. You take out a few % a year to pay for your cost of living. For example, you rent a house, or take out a mortgage and pay for the house over time using the few % a year. Even ignoring all tax considerations it's often better to buy with a mortgage rather than full cash. For example a few years back you could get 1-2% mortgage rates in the UK. Right now it's more like 4-5%. Ignoring tax fun, if you have 10 mil in a share index returning say 7-8% annually and you want to buy a 5 mil house then your best strategy is to sell say 500k for the deposit, then sell just enough to pay the interest + minimum repayment in all following years.
duped 2y ago
[flagged]
kgwgk 2y ago
> We don't tax unrealized gains for that exact reason. I may be missing your point but the example you give looks like an argument to tax unrealized gains. > Let's say you have $10M in in index funds. You don't want to cash out and pay capital gains, so you get a $5M credit line with your stock as a collateral. Then, there's a market crash, your collateral is all of sudden worth just $4M, and you have a bank knocking on your door - but you already spent $5M on a McMansion. Now what? Now you have a problem caused by leverage - and it was at least in part because you didn't want to pay taxes. If unrealized gains had been taxed just the same the concern about paying taxes when cashing out would disappear.

HDThoreaun 2y ago

The people utilizing this strategy are consuming on the order of .1% of their wealth a year. They face effectively zero risk of default or liquidation because theyre not taking a loan against half their portfolio.

doe_eyes 2y ago
Nah. Or rather, I don't doubt that some billionaires do, but they're not the target audience. First, not many billionaires spend time on Reddit. Second, if you're Warren Buffett and have obscene net worth but minimal living expenses, there's really no point. It doesn't matter if you're spending .1% or .125%. If you do borrow against your assets, it's usually to invest, not pay the bills. People preoccupied with strategies like that are the ones who are burning through their net worth at a much higher rate, so the difference in tax burden actually makes a difference. They're usually just wealthy enough to have a "wealth advisor". Doctors, successful techies, business owners, etc.

gen220 2y ago

Yes, people have lost a lot of wealth this way in market downturns. It’s greatly ironic: in the interest of avoiding minor taxes, they lose major assets to their bankers. It wouldn’t surprise me if the same bankers who profit in the downturn from the margin calls are the ones who sold their clients on the strategy. Any time you go into debt you need to make sure you have a margin of safety. It’s an instrument of some value but it’s a sharp blade to be wielded carefully.

throwaway22032 2y ago

You don't take out 50% to buy another asset. You take out a few % a year to pay for your cost of living. For example, you rent a house, or take out a mortgage and pay for the house over time using the few % a year. Even ignoring all tax considerations it's often better to buy with a mortgage rather than full cash. For example a few years back you could get 1-2% mortgage rates in the UK. Right now it's more like 4-5%. Ignoring tax fun, if you have 10 mil in a share index returning say 7-8% annually and you want to buy a 5 mil house then your best strategy is to sell say 500k for the deposit, then sell just enough to pay the interest + minimum repayment in all following years.

duped 2y ago

[flagged]

kgwgk 2y ago

> We don't tax unrealized gains for that exact reason. I may be missing your point but the example you give looks like an argument to tax unrealized gains. > Let's say you have $10M in in index funds. You don't want to cash out and pay capital gains, so you get a $5M credit line with your stock as a collateral. Then, there's a market crash, your collateral is all of sudden worth just $4M, and you have a bank knocking on your door - but you already spent $5M on a McMansion. Now what? Now you have a problem caused by leverage - and it was at least in part because you didn't want to pay taxes. If unrealized gains had been taxed just the same the concern about paying taxes when cashing out would disappear.