Hacker News Reader

Comment by NotYourLawyer | Hacker News Reader

Taxing unrealized gains is unworkable.

Changing the definition of what constitutes "realizing" a gain is workable, however. For example, if you put $50M in stock as collateral against a loan to buy your yacht, you are very explicitly "realizing" the value of that, both by getting multiple parties to agree on its value and put it on record in a federally-regulated transaction (realizing in the sense of "making the value real"), and by actually getting a corresponding wad of cash out of it (realizing in the sense of "reaping the benefit"). Using the fact that it hasn't actually been "sold" as the basis of a claim that its value is "unrealized" should be recognized as the tax dodge it is.

How does the loan hack work here? I feel like there's a step missing in the explanations I always read. You take a loan to buy your yacht with your stocks at collateral, then somehow (?) get untaxed cash to pay the loan back?

As a pleb my guess would be to just get new loans, bigger and bigger, that pay off the previous loan debt plus what you need next.

Once you die the estate settles the loans via the creditors just grabbing the collateral. I think it would never get taxed then no?

So, what I'm trying to get someone here to confirm (with no success so far) is that none of this would be a issue to speak of without inheritance cost basis step-up? Am I correct to understand that that's the real issue, and wash sale rules etc. are just distractions?

You never pay them back. Just pay interest which you also borrow. This might stop being as attractive if interest rates are high and inflation is low though.

Hm I don't quite believe this explains the story. How much does debt does someone like Ballmer carry to their death, and how much do they pay in interest?

I think that's really all there is to it. They do have to pay the interest, and the cash they use to service the loan isn't untaxed, but they were paying that tax anyway. It does assume that the have the cashflow to service the loan completely independent of this deal, but the point is it means they get the best of all worlds: they get immediate access to the cash value of the stock, they don't pay taxes on that value, and they continue gaining as the stock increases even more in value. But you're right, they aren't really avoiding the tax on the stock gains, they're just deferring it way down the road, which is particularly beneficial when your heirs get to step up the basis of what they inherit.

Yeah so the ultimate source of the problem seems to be the basis step up, not any of the rest. So why isn't that identified as the source of the problem?

I suppose one thing nobody has mentioned is that deferral can also help you wait for a year when the rate of the top tax bracket is lowered? Maybe that's a significant component too?

I think it's possible that eliminating the basis step up could change a lot of incentives to do this sort of maneuver, yes.

For folks this wealthy, I doubt the difference in tax brackets make much of a difference. What's classified as income is probably such a small portion of what they get taxed on that it just doesn't matter.

Sorry, to clarify, I meant the rate of the top tax bracket. Not the threshold. I edited the comment to clarify.

Still, if you make $10MM/year in cap gains and what qualifies as "income" is in the hundreds of thousands, do you care what the top rate is?

Depends what kind of capital gains you have. I have no idea what they have, but short-term capital gains are treated as ordinary income.

And obviously the logic would be the same for if/when they change the long-term capital gains tax rates.

A HELOC on your home is a tax dodge? That will be news to millions of middle class people.

I suspect you already know that these millions of middle class people almost certainly would not have been paying taxes on that rise in the value of their primary residence, so no. A HELOC is not a tax dodge.

Politically maybe but not practically.

What are property taxes? Effectively this but for a specific asset.

Granted they are not based in the rise in value. But the idea of paying tax for holding something is not new.

Property taxes are consumption taxes.

Taxing stock ownership is a tax on investing.

I am talking about taxes paid yearly per property by the owner even it they don’t occupy the property

They are still consuming those property-hours.

Reply on news.ycombinator.com