as soon as wealth of any sort is collateralized the tax code should treat it as liquid and tax it. preferably heavily.
Here's an idea:
- Capital gains become taxable when you borrow against an asset, proportionate to the amount borrowed. - The gains which have already been taxed are added to the asset's cost basis, so they're not taxed again on sale (basically same as sell and rebuy).
If the shares subsequently tank, you can carry forward the loss against future gains on the same asset, but can't claim a refund or offset unrelated gains (to avoid incentives to transfer value to a different company and dodge liability, etc.)
For example:
2000: I buy $1M of S&P 500 ETFs.
2026: They're worth $8.5M ($7.5M gain). I borrow $2M against them, effectively realising ~24% of the gains (~$1.75M), and pay CGT on that amount. My cost basis increases to $2.75M.
2030: I sell up for $10M. Instead of paying CGT on $9M of gains, I pay it on ~$7.25M, since the rest was already taxed.
Perhaps for the initial purchase this type of income-based approach on debt financing could be waived as an exemption, and could apply to financial products like home-equity line of credit (HELOC) loans.
So I earn $A and pay $B income tax leaving me with $C.
I take $C and use it to buy stocks. I later want to borrow money against my $C (+ gains, $D) of stock, and now I pay income tax on $C + $D presumably at the same rate as I paid on $A, let’s call that $E.
Later I sell up, with an additional $F of gains. Now I pay capital gains on $D+$F, call it $G.
So from my $A+$D+$F of income (the initial income plus the capital gains on my investment), I’ve paid $B + $E + $G in tax (income tax on the full amount I earned, income tax on the amount left after I paid the first batch of income tax plus income tax on any gains made on my investment before I took out the loan, and then capital gains on the full gains both those which have already been taxed at the income tax rate and those which haven’t yet been taxed).
Not sure that’s actually easier.
I borrowed against my house to buy it. Why shouldn't I be taxed when I got my mortgage?
If you are borrowing to buy the house in the first place, then all of the capital gains have already been taxed, so it's not analogous to this scenario.
Depending on the housing market a property price could rise that much while still under mortgage and not everyone pays mortgages off in term.
The fundemental issue with tax law imo, is that tax lawyers write it and the spend years in the dark offering their services to bypass it.
It would be like there being a category of specialist lawyers who openly offer hidden options to murder people.
It really is quite bizarre in my opinion.
We already have definitions of what realized and unrealized capital gains are and we already have the rule about how much capital gains on a primary residence are exempt from taxation.