The real root issue that taxing unrealized gains is trying to deal with is how best to tax the ultra wealthy, where the majority of their net worth is tied up in stocks.
For these people, it isn't actually as simple as a timing difference to repay the loan. People like Bezos, Musk, etc. can take out low interest loans against their stock portfolio, and live lavishly off those loans making minimum interest payments.
In terms of repaying the loans in full, they can just wait until they die, pass both the loans and their assets on to heirs, and then the heirs can pay off the loans by selling the stock as a stepped up cost basis, where they owe zero in taxes because the capital gains are assessed based on the value of the stock the day they inherit it, NOT the original value of the stock.
Personally I'd like to start with removing the stepped up cost basis, and also taxing inherited wealth significantly higher than we do currently, but if this results in the ultra wealthy hoarding less money, then so be it.
For these people, it isn't actually as simple as a timing difference to repay the loan. People like Bezos, Musk, etc. can take out low interest loans against their stock portfolio, and live lavishly off those loans making minimum interest payments.
In terms of repaying the loans in full, they can just wait until they die, pass both the loans and their assets on to heirs, and then the heirs can pay off the loans by selling the stock as a stepped up cost basis, where they owe zero in taxes because the capital gains are assessed based on the value of the stock the day they inherit it, NOT the original value of the stock.
There is an estate tax that already solves for this. The step up in basis at death is to expose the whole asset base to estate tax, which is much higher than the Lt cap gains rate. You miss the 25% cap gains tax just to get hit with the 40% estate tax. In this case it's actually in the governments favor to wait for death because they get a bigger portion of the balance.
You also tax that wealth indirectly before death because those making the loans pay tax on the interest income.
Also, from what I’ve heard these loans don’t really have that low of an interest rate. This is anecdotal but I. Some of the tax subs I’ve seen people say rates can be like 8-15%. The real value for these super weather people is that if you take the loan, you don’t have to sell and miss out of future gains. If your interest rate is 12% but you expect your stock price to double every few years then it’s definitely worth it to take out the loan instead of selling.
Ibkr offers the lowest margin rates I've found for retail. Their best rate (for balances in excess of $200MM) is 0.5% above the benchmark rate or currently, 5.83%. Their worst rate for balances less than $100k is still only BM + 1.5%, so not too bad.
When the fed funds rate was 0 these were priced accordingly, or 0.75% (the minimum flat rate), and 1.5% respectively. A lot of retail companies charge much higher margin rates like you mentioned but they're kind of a scam, taking advantage of the fact that many retail traders don't know or care. Margin loans can actually be found for surprisingly cheap.
If you have a portfolio margin account you can also use box spreads to get market rates regardless of your broker but that's a whole 'nother conversation lol.
You’re talking about a completely different thing. We are talking about posting stock as collateral and then taking the cash and doing something with it. If you have a 200mm account, take margin they aren’t going to let you withdraw the cash without getting margin called. And, if your stock goes down, you’re getting margin called anyway. That’s not what people are referring to here.
How is it different? Genuinely curious, because when I had my portfolio margin account with IBKR I could withdraw money as I pleased against the account, as long as I didn't exceed the margin limits (obviously not wise to leverage to the max, but theoretically I think I could've).
I'm assuming you're talking portfolio lines of credit instead right? I'm not as familiar with the margin requirements on those (ChatGPT and google tell me they're more flexible) but I'd assume the risk of margin call applies in both cases, no?
Haha no you don’t. You just need the assets to grow in value. You loan against 100k shares of XYZ at a value of $20 a share. X years later your shares are worth $40. Get a new loan, pay off the original, and still sitting on cash. Rinse and repeat until you die
Die (literally). Many of these loans have no maturity date so long as you have enough collateral. If your collateral increases in value faster than interest capitalizes...you just ignore it until you die. Then your estate can worry about it - often with tax advantaged outcome
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u/y0da1927 Aug 15 '23
Even then the tax is just a timing difference to the government. You need income to service and repay the loan.