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That is sort of true. The real benefit of a margin loan is that you can borrow against assets you've held less than a year to avoid the gains being taxed as ord
by EPWN3D 2y ago
That is sort of true. The real benefit of a margin loan is that you can borrow against assets you've held less than a year to avoid the gains being taxed as ordinary income. Then when they've matured, you can sell them and only pay a 15% or 20% tax on the gains (depending on your active income). But even outside of that, margin loans are a way to bet on your holdings growing faster than your loan's interest rate, irrespective of taxation.
This kind of thing became popular in the last decade because interest rates were near-zero, but it makes a lot less sense in today's macro climate. A margin loan today is a much riskier, more expensive proposition. It's not like before where you could get one with a 3% interest rate.
Moreover, the progressive pearl-clutching about margin loans overlooks the flip side: the margin call. Yes, it's a great strategy for avoiding some taxes, but it's not like it's zero-risk. While trying to avoid some taxes, you can wind up losing a big chunk of your holdings because the market had a bad week.
Maybe it's appropriate to put a reasonable limit on the total debt an individual can take on against their capital holdings or something, but if you've got a portfolio that you think will grow at 15% YoY, and you want to give it the opportunity to do that while getting some cash in the short term, I don't see the problem if there's a financial institution willing to make that loan.
- modeless 2y agoThe problem with margin for long term borrowing (other than margin calls) is it's not fixed rate. It generally has no interest rate guarantees at all. If you start doing buy-borrow-die at 2%, that could easily become 10% or more, and that's on your entire accumulated balance, and it compounds. Then either you suck it up and absorb the high interest, erasing some or all of your tax savings, or you are forced to sell to pay off the loan at potentially a bad time, at which point you pay the tax anyway and give up on stepped up basis entirely. The people doing buy-borrow-die are not just doing it on margin. They have special arrangements with a bank. Also, if you are able to beat interest rates with your investment, the government wins too. The tax liability grows at the same rate. Faster, actually, since the gain becomes a larger percentage of the total. You are not cheating the government out of anything. Quite the opposite.
- EPWN3D 2y agoVery true, I forgot that margin loans weren't fixed rate either. And yes the BBD people have special arrangements with the banks because they are borrowing huge amounts of money against huge amounts of stock (and have probably agreed to a selling schedule). As with most things, it gets easier when you're ultra-wealthy.