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?
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.
> 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.
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.
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 :)
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.
> How? There is nothing different from the Amex example... In both cases I'm showing assets held elsewhere as proof that I'm rich.
but you are saying to Uncle Sam that you are not rich... so you are just a big fat liar here and your punishment should be cap gains taxation!!!!
> In the end, the behaviour stays the same: the rich let their stock appreciate while they borrow...
This is exactly what needs to be stopped except of course it won't be cause you know...
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.
(Likewise appreciated the discussion.)
Heh.
You wrote:
> Not technically secured.
For these private bank-style loans backed by liquid equity stocks, are they considered secured or unsecured? Honestly, I don't know.
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.
[1] https://www.icmagroup.org/market-practice-and-regulatory-pol...
This wouldn't make any sense, you didn't use it (unless the call gets exercised).
So you have 200 shares and write 1 call, you'd pay tax on the appreciation of just 100 shares? Then sell another call next week, pay taxes again?
> What about presenting your brokerage statement as proof of assets to a mortgage banker? Of course not
I though it was simple. Now the loopholes start to appear.
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 how you sound.
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.
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..