> If you own stocks, your brokerage will lend you money at a very low rate, secured by the equity - typically up to about half of your stocks' worth.
This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."
Unrealized gains should never be taxed. However, as soon as you try to use it as realized in ANY way you should be taxed immediately.
That does not track for me. If someone has $20k in Schwab and chooses to use their credit card instead of selling stock and paying cash, I don't think they should have to pay taxes on that or suffer a criminal penalty. Same for taking on a car loan or a mortgage.
If that's what was happening you'd be right but it isn't. Credit cards have high rates and low limits for a reason: they are unsecured credit. Loans with collateral are secured by the collateral, and it makes some sense that should be considered a realized gain for that collateral (or loss for that matter).
My bank will give me a 6 figure line of credit at prime+0.5% because they see all the assets I have (savings, cash, investments, mortgage). The line of credit is indirectly secured against all of the assets my bank can see.
Should I be taxed when I use the line of credit my bank extends to me?
What OP is missing is the role of collateral. It becomes more important the more perilous the borrower is or might be.
Apple borrows for 20 years unsecured at 31 bps above the U.S. [1][2]. That wouldn't contract much if they offered collateral, because the difference in relative risk is modest to the point of immateriality. Similarly, someone with a century of living expenses in marketable securities really only needs to be restricted from blowing their stockpile--other risks are absorbed by that wealth.
TL; DR The rich don't need collateral as much as the middle class and poor. Penalise the use of collateralised loans like that, and you just make collaterised lending go away or become much more expensive.
> Elon could just go fetch $44bn from a bank to buy Twitter without anything to back it?
Collateral "becomes more important the more perilous the borrower is or might be." It's immaterial to "someone with a century of living expenses."
Elon Musk could probably have borrowed even $100mm unsecured on terms damn close if not identical to that which he could get on a secured loan, ceteris paribus. But Elon is uniquely leveraged. That makes him a more perilous borrower. And $44bn isn't lifestyle borrowing, either.
Nevertheless, he could still probably get a hundred million lent unsecured on terms quite close to his secured rates--there are groups who would do that for relationship building alone.
Why should it be illegal? It’s not a realised gain. It has to be paid off … with money which has to come from somewhere (and be taxed as income or realised gains or whatever).
What reason do you have for wanting it to be illegal, other than not liking it?
How is it not realized? When I can use it as "realized" to borrow against it? When it comes to paying taxes I go "sorry Uncle Sam, this is fictitious, I don't really have this" but then I head over to the bank and go "look at my brokerage accounts, I have ALL THIS MONEY, lemme borrow against this now all-of-sudden realized money..."
You are paying property tax on that money you are using for that HELOC.
If I bought a house at $300k, I owe $250k and house is now worth $750k the County will be slapping me with $10k/year property taxes whereas before I was paying like $3k. My gains are realized each year via property tax assessments :)
> My gains are realized each year via property tax assessments :)
You are confusing two very different things. You'll realize the gains (and have to pay taxes on) your house value increase only when you sell it. The fact that you were paying property taxes on it all along while owning it has nothing to do with that.
The fact is though if you live in America are paying property taxes on your home, you are NOT hiding from the IRS the fact that you do - you are not saying "sorry, I don't really own this home and I won't be paying anything to you until such later time when my ownership will be revealed at the grand sale at which point I'll pay some taxes"
With "unrealized" stock gains you are doing just that - hiding ownership so you don't have to pay taxes while enjoying the perks of the ownership when it suits you
> if you live in America are paying property taxes on your home
I own in Wyoming. My property's assessed value is like 1/10th the market rate. My neighbour--just checked!--who owns a property like ten times my size, across two plots, and far more lavish than my own has an assessed value similar to mine. The real estate records even have a line item for "actual value" separate from assessed value.
Not familiar with the specifics, but I know California and New York similarly have assessed values that are entirely unmoored from what the property is actually worth.
This is most states, because the increases are capped for existing property owners especially for first homes - the homestead exemption. If you own a house you live in for a long time in a hot market your assessed value can be very low relative to market.
You do not pay property taxes to the IRS, or report the value of your property to them unless you sell it. Federal property tax is unconstitutional. It took an amendment for the feds to be able to do income tax, which has been broadly interpreted to include things like capital gains and income taxes.
Because of the definition of what realized income is. Borrowing is not income.
You mention below that you own a Washingtonian condo and a Virginian home. Let’s imagine that they are both $100,000 and that you have no other money or debts. Your net worth is thus $200,000.
You go to your bank and say ‘I would like to borrow against the value of my assets please,’ and they say, ‘certainly, here is $90,000.’ Your bank account now goes up $90,000, your condo is still worth $100,000 and your home is still worth $100,000. Your net worth is still $200,000 (not $290,000) because you also now have $90,000 of debt. You did not realise any income, even though your bank account is now full of money, because your debt account is now negative.
‘But I am paying property taxes!’ you might say. Sure, property taxes are a form of wealth tax, and there is no similar tax on stocks — but that is irrelevant to this discussion (although it could be relevant in a different one).
To illustrate why, let’s use another example. You still have the Washingtonian condo and the Virginian home, and they are both still worth $100,000 apiece. This time, you only borrow $45,000 against the value of the condo. That money moves from a bank on Washington to your bank account in Virginia. Do you owe Virginia income tax on that money? No, because it’s not income. But Virginia is not getting paid any property taxes for the property backing that loan! Irrelevant, again because a loan is not income.
Likewise, you can imagine owning another property in some state or country without property taxes at all. You borrow against it, is that loan income? Nope.
Now, let’s imagine the counterfactual, where loans count as income. You go to buy your $100,000 condo, put down $20,000, borrow $80,000, spend all $100,000 on the condo — and now you would owe income taxes on that $80,000. Gosh, that doesn’t seem fair. You had $20,000, spent it all borrowed the rest, and now you own a condo, owe property taxes and owe income taxes on $80,000, even though you have no money.
Does any of this help you understand? Owning an asset is not fictitious, it’s just not income. An income tax is levied on income, so an asset is not relevant to an income tax (relevant to an asset tax, of course!).
Well, taxing borrowing as income is not what is being discussed here though.
It would be workable to make borrowing against an asset at a certain value equivalent to crystallizing any gain on that asset, pro-rated on the amount borrowed: you own a 2M house, that you paid 1M. You borrow 500k against it, it would be as if you sold 1/4th of it and you would pay CGT immediately on the 1/4th of (2M-1M); the basis would be adjusted so that when eventually you sell the house you pay CGT only on the yet-unrealized gain.
> as soon as you try to use it as realized in ANY way you should be taxed immediately
You're trying to define a rule based on intent. That's doable. We do it all the time. But it tends to get messy, fast. How do you differentiate investment leverage from realizing gains through borrowing? If you track distributions, does a commensurate reduction in contributions count? What if the borrowing is done against the portfolio at large, or unsecured?
It is not messy at all if you use KISS. You do not differentiate ever - ANY usage of unrealized gains makes them realized. Very simple to implement but of course won't ever happen :)
> ANY usage of unrealized gains makes them realized
What does "usage" mean? If you write a covered call, did you "use" the asset? If your broker lends your shares out, are they being used? What about presenting your brokerage statement as proof of assets to a mortgage banker? What about--I've done this--showing your brokerage statements to American Express to get a better rate?
I'm still only talking about publicly-traded common stock, mind you.
> simple to implement but of course won't ever happen
Possible, but stupid. You'd raise taxes on the middle class who can't afford advice (or personal attention from lenders) while doing little to those who can dance in the ambiguity offered by what seems simple from a distance but is devilishly complex up close. Because at the end of the day, what you're trying to differentiate is intent. And intent is easy to hide and expensive to uncover.
The core problem in this scheme isn't so much the deferred taxes as much as the eliminated ones: capping the step-up basis to e.g. $10mm, the EPA's statistical value of a human life, would do the trick. Unlike ascertaining "usage," whether or not someone has died is generally simple to determine.
I think this is the core issue for me in these discussion - it is not complex at all. If you sell your securities - you pay a tax - that part is simple. Until they it is "unrealized" - right?
> If you write a covered call, did you "use" the asset?
Yes
> If your broker lends your shares out, are they being used?
Yes
> What about presenting your brokerage statement as proof of assets to a mortgage banker?
Of course not
> What about--I've done this--showing your brokerage statements to American Express to get a better rate?
Of course not
> You'd raise taxes on the middle class who can't afford advice
This is always funny to me, middle class :) For sure it would not affect the middle class and there.is not need to "afford advice" when there is nothing complex about this that needs an advice of anyone.
> Because at the end of the day, what you're trying to differentiate is intent
Not at all, it is not "intent" at all - it is just very, very simple... You can own stock and keep it there - no problems. You want to use it for ANYTHING, you pay taxes on it.
> What about--I've done this--showing your brokerage statements to American Express to get a better rate? Of course not
You say "there is nothing complex about this" after conceding this loophole the size of a planet.
For starters: loan with a covenant that governs further borrowing and requires you to instruct the lender if your marketable assets fall below a certain value. Not technically secured. But not relevant if you're lending tens of millions to a billionaire--plenty of firms will provide this. Next up: loan to heirs. Next up: unsecured loans at preferential rates if you store your securities with the lender. (This is already a thing.)
> want to use it for ANYTHING, you pay taxes on it
Swapping "use" for "usage" doesn't address the fundamental issue.
First, you are making lots of great points in your posts. Thanks for your comments.
You wrote:
> Not technically secured.
This raises a very interesting question. When institutional clients use a "repo" trading desk to pledge liquid assets for cash (or vice versa), from a legal perspective, it is not treated as a secured loan. (Yes, it is bizarre. Truly, looks like a duck, walks like a duck, quacks like a duck... but not a duck!)
For these private bank-style loans backed by liquid equity stocks, are they considered secured or unsecured? Honestly, I don't know.
> from a legal perspective, it is not treated as a secured loan
Repos are collateralized and thus secured [1]. Legally, they don’t need to be because if the borrower defaults they just don’t buy back the asset; the seller has no further obligation to sell it to them and carries on their merry way.
Repos do however, require special exemptions to avoid being traded as purchases and sales by the IRS, so this is unlikely a valid workaround to a continuous step-up basis czar.
I see where you are going with this but you are changing parameters here.
> For starters: loan with a covenant that governs further borrowing and requires you to instruct the lender if your marketable assets fall below a certain value.
You did not say anything like this, you said "What about presenting your brokerage statement as proof of assets to a mortgage banker?" - this is like me showing my bank account balance during speed dating to flex a bit :) Your example would be 1000000% taxed as you are obviously using it as realized gain.
> Next up: loan to heirs.
If you are using real money, loan all you want. If you are using "money" you are telling Uncle Sam you do not have then you pay tax before you borrow that.
> Next up: unsecured loans at preferential rates if you store your securities with the lender. (This is already a thing.)
This is up to the lender... If they want to use my skin color or my gender or my zipcode (all of which they do) they can also use other stuff as well
I get that I am oversimplifying this but surely a system can be put into place that prevents current madness :)
> Your example would be 1000000% taxed as you are obviously using it as realized gain
How? There is nothing different from the Amex example.
In both cases I'm showing assets held elsewhere as proof that I'm rich. In neither case am I pledging anything. In both cases the letter of the contract requires me to notify the lender of material changes in my financial condition, and in both cases I get a favourable rate--sometimes equal to the pledged asset rate.
> is up to the lender
Yes, and they'd rationally replace secured loans to anyone with unsecured loans to the very rich which automatically accelerate on the borrower's death and carry on as usual. In the end, the behaviour stays the same: the rich let their stock appreciate while they borrow, personally, to fund spending, all the way until they die when the bases step up, they cover the loans and then the heirs get to do the same thing.
> you are saying to Uncle Sam that you are not rich
No I'm not. I'm reporting all of those assets as held. They've gained in value, and if and when I sell them I'll pay tax on those gains. In the meantime, they're just sitting there. Appreciating unrealized. And making me look rich to potential lenders.
> exactly what needs to be stopped except of course it won't be cause you know
No, I don't.
I see an analogy with the corporate death penalty. It's an appealing but ultimately stupid concept. Yet it serves a rhetorical purpose: it distracts us from debating massive, debilitating fines. Divide and conqueer. Similarly, we eliminated the step-up basis partly in 1976 and completely in 1980, and then repealed the estate tax in 2010. Those--restoring either the estate tax or, at the very least, the carryover basis in some form--are the real policy wins.
> ANY usage of unrealized gains makes them realized
I don't feel like you're thinking this through.
Can you define (precisely enough to write into the tax code) what is "usage"?
For example, let's say I go to get a second loan for a vacation home. The Uniform Residential Loan Application asks me to list all significant assets. Such as my first house.
Am I "using" the value of my primary home? The second loan is not a lien against the first home, I'm not borrowing anything against it. They are unrelated. But the lender will probably consider my equity there as additional net worth which can be a factor in approving that second loan.
So if you take out a small business loan and use any type of collateral you now have to pay taxes on it?
Significantly increasing the cost of borrowing for most non large companies is certainly a great idea.. it obviously won’t lead to less competition and more concentration.
> It is not messy at all
If you ignore the consequences and implications (or can’t grasp them at all) then sure..
No offense, but I don't believe you understand the nuance of the thing you're talking about.
It is very easy to say 'any attempt by a murderer to flee the state, and he should be thrown back into the jail' for someone with limited education about western law and order.
This is exactly what the billionaires have been able to convince the masses :) It would be "very hard, impossible" to implement a system in which you cannot for the purposes of paying taxes claim you do not have some sht while turning around and heading over to the bank to get a boatload of money borrowing against that same sht - need a genius to figure that out...
No, the fact that your proposal isn’t thought through at all and is entirely impractical doesn’t mean that solving this problem is "very hard, impossible". That seems entirely unrelated..
The key difference here is whether your investment remains at risk. As long as the value of your investment is at risk, then the investment is considered unrealized.
Once you cash in your chips (sell) then the investment becomes realized.
Someone getting a loan against their stock portfolio is still at risk of loss of value of their holdings, therefore the investment gains remain unrealized.
>This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."
Do you think the same should apply to HELOC loans? It's basically the same thing but with your home rather than stocks.
Yes why not, in the general case. With an exception when the loan funds are being reinvested in the property itself. But in the general case where home equity from appreciation is being turned into cash that's then used for other purposes, that looks an awful lot like realizing a gain to me.
In fact this might even be advantageous to certain homeowners who live in a property as their primary residence and then convert it to wholly rental use. Before you move out, take a loan to easily realize of 250k/500k gains which you can then deduct before it's no longer your primary residence.
Your home gains are being taxed already via ever-rising assessments on property taxes. So you are not hiding that and pretending that it is unrealized. You additionally do not pay real estate gains taxes on first 250k as well as...
>Your home gains are being taxed already via ever-rising assessments on property taxes.
it's a separate tax that's on the value, not the gains. Moreover, if we're allowed to bring in other taxes as offsetting factors, do capital gains on companies get a pass because corporations pay corporate taxes as well?
If you don't want to be banned, you're welcome to email hn@ycombinator.com and give us reason to believe that you'll follow the rules in the future. They're here: https://news.ycombinator.com/newsguidelines.html.
> Millions of Americans sit on appreciated home asset. Should they be taxed?
You live in China and you do not pay property taxes on your home? If you live in America baby, you are not allowed to own anything - especially not homes. For that "right" you have to pay these things called property taxes and you have to pay them all the time...
Once we get some same thing going for securities maybe we can do some comparisons like that - until then ... :) you are too funny mate, I needed this laugh
One could argue stocks be handled differently than homes. Or, to better capture the spirit of the proposal, one would progressively tax unrealized gains used for collateral.
This should be illegal of course... You cannot for the purposes of paying taxes say "hey, I don't actually have this money, this is unrealized gains" and then turn around (to brokerage house or anyone else) and say "hey, look I actually do have this 'money' - lemme borrow against it."
Unrealized gains should never be taxed. However, as soon as you try to use it as realized in ANY way you should be taxed immediately.