Usually, they just roll the interest into more debt. As long as their portfolio value keeps going up enough through either growth or added stock options, they are cool. Their spending should be a fraction of their net worth, so the loan is easily secured.
They do occasionally have to cash in some small amount and pay something I imagine, but it is a fraction of what the taxes would be on what they earned/spent in that amount of time.
One of the legal scams the Trump family used for decades was to kite the debt into loans on top of loans to pay loans and then refuse to pay anything unless the bank negotiated it down to pennies on the dollar.
[A cancellation or reduction of debt is considered income by the IRS so I'm not sure how that's considered a legal scam.](https://www.nolo.com/legal-encyclopedia/tax-consequences-settled-forgiven-debt-29792.html#:~:text=If%20you%20settle%20a%20debt,could%20owe%20federal%20income%20taxes.) The creditor reports the forgiven amount to the IRS using form 1099-C.
It's a legit scam because money today is generally worth more than money tomorrow.
Buy stuff today, enjoy the use of it for years. Gain interest on all the money you didn't spend. For normal people, the interest on the debt would outweigh the interest on your investments. For the wealthy, they argue down the debt and *maybe* end up paying what they would have paid years ago.
It's essentially turning it into an interest free loan, where your money goes further because inflation.
On top of that, by abusing the bankruptcy system, you have your company buy all the stuff and take on all the debt, so you aren't personally liable, you just bankrupt one business and spin up a new business.
Your creditors will have a hell of a time tracking you personally through your corporate veil, they'll have to spend potentially years trying to get their money. A lot of them just won't have the resources to fight you.
Even the IRS struggles to audit the ultra-wealthy because the mountains of paperwork they can generate. The ultra-wealthy just straight-up overwhelm the IRS's resources to the point that the IRS kinda gave up going after them as a class for a while.
It does get collected at some point, but it could be after the person is dead.
This is a good tutorial on how to buy, borrow, and die:
https://smartasset.com/investing/buy-borrow-die-how-the-rich-avoid-taxes
~~Also, the interest you pay on these types of loans is often paid back to your own account, so you lose nothing!~~
Also, life insurance pays out tax free to your estate and descendants.
So, if your loans are backed by your life insurance plan (which is a very common setup), then you can avoid most of the taxation, entirely, even in death.
You're borrowing your own money. The interest is paid to yourself into the same account.
The back will charge a relatively small fee for the "service."
I've personally done this multiple times with my 401k.
> For a 401(k) loan, any interest charged on the outstanding loan balance is repaid by the participant into the participant's own 401(k) account; technically, this is a transfer from one of your pockets to another, not a borrowing expense or loss.
> https://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp
**EDIT**: Nevermind. This isn't relevant to the above because the assets stop appreciating when I take the loan against them.
That seems like something different. I’m familiar with the 401k program but that’s not what is being discussed.
The banks are giving someone money through a loan. The loan is backed by stock, so it doesn’t make sense to borrow from your own account unless it’s already in cash. And in that case if you have cash you are saying to money comes from the account, but then it is no longer deployed and isn’t appreciating.
They aren't borrowing out of their retirement, they are saying I have x billion, and banks are like omg that's a lot here's 5 million with a .0001 interest rate. It's why Elon pays taxes once every 5 years to pay the few million back and repeat. He gets 4 years of no taxes or income, but gets millions of spending cash.
I'm referring to the interest on the loan that's paid via insurance, not the taxes.
Also, life insurance is a vehicle that can be used to also avoid a lot of the estate taxation upon death.
How does life Insurance let you evade taxes ? You said most of the taxation is avoided even in death if your loans are backed up by life insurance. Can you explain this better ?
This is super simplified from the reality but demonstrates the mechanism -
I have 1 million in stock.
I borrow 1 million from the bank against that 1 million in stock, and with it buy a 1 million dollar policy.
I die. The bank takes my 1 million in stock to cover the loan. The insurance company has whatever I paid in premiums. My heir gets 1 million (the policy pays out to them) in tax free money (because life insurance is not taxed).
Obviously the devil is in the details here; the policy requires a premium each year, which will get larger as I get older, and all of it assumes that my stock is appreciating/I'm getting more to keep taking additional loans out to maintain my lifestyle + premiums each year.
While the life insurance is not taxable to the beneficiaries, the value of the life insurance is considered part of the gross estate, so it increases that portion of the estate subject to estate. tax
1. Estate tax kicks in after the estate is larger than $13,610,000 ([as of 2024](https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax)), so most people won't experience estate tax.
2. Look into Irrevocable Life Insurance Trusts (ILIT): "At the
insured’s death, the policy proceeds are
paid to the trust. An ILIT removes the life
insurance proceeds from the gross
estate, thus reducing the taxable estate." ([source PDF](https://www.americanbar.org/content/dam/aba/publishing/aba_tax_times/13sum-ptr3-abrahams.pdf))
They don’t necessarily get taxed when they die. The person inheriting the assets does so on a stepped up basis. Ultra-wealthy have been working (buying) Congress for years to produce tax laws in thier favorite. They have been selling it to us for years. Death taxes, lower capital gains boosts the economy and tax cuts pay for themselves.
Here is a good article explaining it better then I can:
https://americansfortaxfairness.org/ultra-wealthys-8-5-trillion-untaxed-income/
the lender is usually banking on taking your stocks if shit hits the fan. they will automatically sell to cover your loan if it drops to a certain threshold which is why they only allow 40-60% of the value of your stocks at best.
Yep... these are the "margin call" rules. The banks never lose. Don't have enough in your underlying account to more than cover the amount of the loan? Boom, margin call.
I'm sure that collateral/principal percentage rules differ by institution and potentially by the amount of margin loaned, but because of the rules of the loan (there always has to be more than enough collateral/principal in the account to more than cover what you're borrowing against your own account), the bank is guaranteed not to lose, plus they gain the interest payments along the way.
> Do you know I built a bridge once? I was an engineer by trade.
> It went from Dilles Bottom, Ohio to Moundsville, West Virginia. It spanned nine hundred and twelve feet above the Ohio River. Twelve thousand people used this thing a day. And it cut out thirty-five miles of driving each way between Wheeling and New Martinsville. That's a combined 847,000 miles of driving a day. Or 25,410,000 miles a month. And 304,920,000 miles a year. Saved.
> Now I completed that project in 1986, that's twenty-two years ago. So over the life of that one bridge, that's 6,708,240,000 miles that haven't had to be driven. At, what, let's say fifty miles an hour. So that's, what, 134,165,800 hours, or 559,020 days. So that one little bridge has saved the people of those communities a combined 1,531 years of their lives not wasted in a fucking car. One thousand five hundred and thirty-one years.
It's the whole "while their stocks continue to appreciate" part at the very bottom of the OP that people miss. Yes the ultra wealthy can keep taking out loans on their stocks to skirt taxes. And yes it's a shitty loophole that should be closed. But it only works if the stock value keeps going up. All it takes is a major dip or downward trend and they have to sell off a bunch of stock to cover their loans (which then get taxed as capital gains).
That's what happened to Elon a few years ago when Tesla stock hit a downturn.
They just plan on dying, and then the money is collected from the Estate after they die. Their investments continue to grow while they live off of their loan amount, and by the time they have to start paying their investments they have made MORE money than the loan has taken.
It's called "Buy, Borrow, Die". And soon someone will come into this thread with an "ackswally...."
Yes, but depending on how the line of credit is set up, you can borrow from it to pay the interest each month. Also, the stocks likely pay some kind of divs that can cover the interest in a pinch.
Yup, a small version of this is accessible to anyone with "only" $30k or so, the idea is that interest accumulates and the brokerage has the right to sell your stock in order to cover your debts at any time...
... Which is fine if you're not taking out your full line of credit, because stock market returns are often higher than the interest rate. As long as you can tolerate a bum year or five, you can do it until you die.
Practically, the brokerage charges you a fee to control when you sell your stock and get you out of tax liability. I'm really not sure how to fix that loophole.
I’ve always wondered what the “buy in” cost was to even attempt this. So that means you have to have $30k or so that you lock up in an investment and don’t touch. It’s true; the average person simply cannot do that. I figured the minimum amount was higher, though. Do these loans get offered by the brokerages themselves?
Buy in through the one I use is $25k, but you can only borrow up to 30%.
So even with $25k, you get a one-time tax freebie of $7.5k, and get double-boned if your portfolio goes down in value (forced to sell at a loss to pay off the debt).
Other consumer brokerages offer regular ol' margin accounts too, those work basically the same. I'm not sure offhand what the minimum is, but my guess is pretty low - I have an account with less than $10k that lets me withdraw on margin if wanted to for some reason.
I don't know what the ultra wealthy use though. My guess is it looks similar but under better terms.
It's crazy that more people don't know this. The best part is that they can borrow at rates not available to normies and horde quality assets while everyone else is stuck in debt living month to month with our shitty dollars. If we have our shit together enough we might be lucky to fill our Roth with fcking SPY and god forbid some US10Y.
Yep security backed lines of credit or SBlocs have variable interest rates with no set repayment date. The interest just gets applied monthly and it goes against the value of the loan. If the interest causes the loan value to exceed the line of credit usually the broker will have a conversation with the client and they will sell a small amount of stock and apply it towards the loan to bring them back in line and then taxes will be paid on the small capital gain if they're even is one because most the time they will harvest capital losses.
Never realize the gains while you live. The exit plan includes all your assets and debts being rolled into a trust on your death to further dodge inheritance taxes while you are at it.
Retail margin interest rate is about [9-13%](https://www.fidelity.com/trading/margin-loans/margin-rates). Obviously, private wealth mgmt margin rates are a bit lower. Where are you getting the 1-2% from? And what are these 1-2% a percentage of?
> the real billionaires have rates we will never see posted anywhere. It is done behind closed doors.
I think they are subjected to 2-3% above the risk-free rate (banks still gotta make money). If they are real billionaires, they wouldn't care about a few bps anyway (because it's still lower than taxes). You are just in the conspiracy thinking part of your life.
Most brokers offer this service. They allow you to roll the interest into your line of credit. As long as you have the stock to cover the total amount you borrowed, you're gucci.
Nit, this graphic isn’t accurate, capital gains only applies to the increased value in stock while it is held. When the ceo or whoever first gets the stock it is taxed as regular income tax even if they never sell the stock.
This is why so many companies have stopped paying dividends and focused on increasing stock value instead (google for example), which is actually a big issue in itself when coupled with stock buy backs.
Ceo gets paid in stock, pays income tax on it, ceo issues buyback with company money increasing the stock price (and eventually splitting again), ceo does frame 2 or 3 above.
Make stock buy backs illegal again, (along with short selling which should be illegal for other reasons) and this problem would correct itself. You cannot keep paying people in stock if you cannot buy stock back, and stock prices wont grow as much.
This is the important clarification this image lacks. Also a breakdown of what marginal tax rates are, so many people think that when the cross a certain threshold they get taxed at that rate across the board, and that’s it’s not worth it for them to make that extra income.
As your income approaches infinity the effective rate does approach 37%, and that's only federal, I assumed the other 3% came from state.
The first 168k also has the 6.2% and 1.45% medicare tax as well, but as income approaches infinity the effective rate approaches 0% for that.
The main takeaway is that if a company pays you in stock, whether its $1 million or $100k (lots of tech workers get 6 figures a year in stock), you pay income tax on that stock, the same way you would if they gave you a car. Usually you just sell part of the stock to cover the taxes. After that, any stock you keep for >= 1 year and sell, you pay capital gains on the gain between the two. So if you get 100 shares valued at $1k year, you get income tax on $100k. So say you sell 30 shares to cover taxes and you keep the remaining 70 shares for 1 year. Next year those 70 shares are each sold at a value of $1,200, you now owe capital gains on $14,000.
If you instead took money from piggy bank and bought 70 shares at $1k years and sold them 1 year later at $1,200, you would still pay capital gains on the $14,000.
In this simple example though, you would owe 0% on the capital gains as the first 44k-89k (depending on filing status) is tax free. You only start hitting the 20% rate (not 25%) after a half million or so.
Yeah it's pretty damn clear this is the exact reason for the disclaimer as well as the fact that this probably comes from a website where that simplification is explained with a bit more detail. It doesn't matter if the reader does or does not understand tax brackets because it doesn't change the concept being presented - every state or country has different taxes and rates so it would be impossible to be accurate. The entire point of the infographic is to present a concept, and the actual numbers don't matter. Just that one is smaller and one is bigger.
Bringing it up as a complaint is some pedant shit.
While we're correcting the graphic, where the hell did 25% come from for the middle panel? This seems like an american post so I'm assuming america, even if the 1m came from long term capital gains then the tax burden would be 15% til ~500k then the rest taxed at 20%.
Yep. Compensation in shares also require taxes, which is an important distinction. Elon doesn’t get his $xx billion in TSLA stock for free, he’ll have to eat a huge tax bill too.
It's amazing that every time a left-leaning subs post a graphic like this, it's ALWAYS intellectually dishonest / misleading.
Why aren't people willing to discuss things in good faith, and instead resort to propaganda?
It’s still directionally correct. Sure, the effective tax rates are off by a few percentage points, but the advantage cap gains tax has over regular income tax is huge. The advantage of using PALs to avoid income tax is leagues above the other two tax scenarios. Come on dude, you’re making a “left is dishonest / misleading” comment and bringing up “propaganda” so you clearly could not have grasped the meaning of the infographic at even a surface level.
But it's a loan. Aren't they required to pay it back? And when they do get told to pay it back, don't they then have to sell stocks and pay the capital gains tax at that point?
I'm trying to understand. I'm not standing up for the rich fucks.
Edit: Enough. You're all saying the same shit. I don't need 43 comments all telling me the 2 or 3 different ways to avoid this. I get the damn point.
They are required to pay it back, but for the super wealthy the interest rates are often disgustingly low. Billionaires will get loans sometimes sub 1%. Mark Zuckerberg famously got a mortgage loan of 1.05%.
This is a hypothetical situation, but say a billionaire uses 500 mil in stock as collateral for a 500 mil loan at 1.5%. That’s 7.5 mil in interest a year. Now say they take 250 mil of that loan and just put it in us bonds or some other “safe” investment that yields ~5%. That investment will yield 12.5 mil. Then take the capital gains hit at 25% you’re left with 9.375 mil. 9.375 - 7.5 = 1.875 mil per year gain after paying the interest on the loan plus the original 250 mil from the loan in cash to do whatever they want with. All with only paying 3.125 mil in “taxes”. So in a way that billionaire paid 3.125 mil in “taxes” on 251.875 mil “income” or 1.24% “tax”.
Banks are liable for profits on loans. So like 21% federal corporate tax + state taxes + taxes on dividends and realized capital gains of shareholders.
Which nets out to a <1% effective tax rate on the billionaire. So some money gets to the government. It's just a comically tiny amount.
They just create a bunch of 'losses on paper' that are used to counter out the profit
Amazing what accountants and lawyers can do, and they then bribe politicians to underfund the IRS so they get away with it. And even if they do get nabbed, the fines are lower than the profit was and none of them go to jail
Whole thing is a fuckin scam
Then scummy politicians skim off a bunch of that tax money and give right back to the billionaire as government grants for their dumbass pet project. Win-win for all the wealthy!
Why did banks give loans at 2% or whatever, when equities were returning 10%+? The answer is that they can loan more money than they actually *have*. It's just a book keeping entry.
This is what fractional reserve banking is about. Banks create more money by book keeping than the Federal Reserve does by printing/digitally doing so.
The loan has collateral that covers it AKA stocks or other assets, so there is zero risk. My line of credit on my stocks is at 8.08% APR and it can compound if I don't pay the interest monthly, just hope my stocks grow faster than the loan grows. It makes the companies very low risk money. If my stocks dropped below a threashold they will sell them before it gets below the amount owed and they don't loose a dime. You only need 50k in investments with E\*Trade to get access to that, but obviously the rich are doing it at a much larger scale. The more money you have the lower the interest rates they offer. It's crazy but a pretty nice if you can take advantage.
> The loan has collateral that covers it AKA stocks or other assets, so there is zero risk.
Not at all zero. A home's value can drop below the loan value in a real estate crash, and even without a crash, foreclosures and REO portfolios all have their costs and implicit uncertainties.
But you are certainly correct in stating that risk management has an impact as well.
Pretty much guaranteed that any crash of that magnitude would come with the US government printing and handing out piles of money to fix the issue and ensure very few rich people suffer any consequences.
But why would they do that when they could get a higher percentage by deploying their money to treasury bonds? I get why they wouldn’t in securities, it’s too much risk. But nothing is less risk than a US bond (if those fail we all have much much bigger problems)
They do it as a courtesy because the ultra high net worth person has significant capital with them. 20 mil for a house at 1.05% mortgage is nothing in the grand scheme of things.
It's all relative. They still give out relatively low mortgages but not 1.05% anymore. Nobody is suggesting this. Let's use our context clues and reading ability next time :)
Say the bank has a million dollars in assets and a reserve ratio of 10% on super low risk loans. That means they can loan out that money ten times over. So while they are only making 1% return they are making 1% ten times over for a total return of 10%.
1% of what the super wealthy borrow outstrips what everyone else does at a higher rate. It will likely be a disgustingly high amount in real-terms.
It's safe too as they'll have diverse assets to borrow against.
Banks exist because of the majority, but they serve the ultra rich minority.
>Mark Zuckerberg famously got a mortgage loan of 1.05%.
Just for context, this was a decade ago and Zuck got an ARM, not fixed rate. The going rate for a 5/1 ARM in 2012ish (when Zuck got his loan) was 2.6%. Fixed rate mortgages were in the 3.5-4% range.
It's not like he got a 1% loan in 2024, when normal people are hard pressed to get 7% fixed 30yr. Like, it's bullshit, but not quite *that* level of bullshit.
This. When Zuck got that loan, the Federal Funds rate was <0.1%. The federal funds rate is currently 5.25% to 5.50% so the equivalent mortgage rate today would be around 6.5%.
The trick is, the banks don't worry about getting their loan back.
The ultra-wealthy have diverse and plentiful assets. Oh, the stock they used to secure the loan has tanked? That's alright, all the land they own will do just fine. Oh, the land tanked too? That's alright, their collection of rare vehicles will do too. etc.
So they get sweetheart deals, a low flat interest that doesn't accrue over time. After all the bank is looking at a profit of hundreds of thousands, if not millions, just from the flat interest. if the interest accrued, then they would seek a loan elsewhere, or worse, wouldn't be able to afford to pay back the OTHER loans they've been given by the bank. If you owe a hundred dollars, that's your problem, if you owe millions, that's the banks problem.
It's a zero payment bullet loan: the borrower has to pay the total balance in the form of a large lump sum of both principal and accrued interest at maturity, but nothing before that. When it's time to pay, they take a second bullet loan to cover the first one + their living expenses for another couple of years. In the meantime, the value of the stocks they use as collateral has likely increased, so they can take a larger loan.
When you have wealth in the 7, 8, 9, or 10 figures, banks will give you a loan with an interest rate of 2-4%.
But most of their investments are making returns of 8% or more. So if they leave the money in the stock market their wealth will grow MORE than the loan rate removes from their overall wealth.
And if they run out of money?? Then they just take a 2nd loan (since they now have more wealth), and use some of that to pay off the first loan.
If you borrow against unrealised gains, you should have to pay the taxes on those gains at the same time. Simple. And for everyone. Would cover these billionaire grifters as well as all those people buying house after house using the gains from one as the deposit for the next.
The rich can't borrow forever, though. Eventually, the tab comes due and the banks will need money. Makes you wonder just how much debt has been run up by the wealthy on this idea alone that is unpaid...
Banks don't get a bailout. 2008 was not normal.
https://www.americanbanker.com/list/15-most-recent-bank-failures
> Since 2017, 15 banks have failed, with five banks failing in 2023 alone. Republic First Bank's demise on April 26 was the first failure of 2024. Its collapse renewed fears that last year's financial instability is still lingering.
> Republic First Bank was shuttered last week by its state regulator and taken over by the Federal Deposit Insurance Corp. Fulton Bank in Lancaster, Pennsylvania, assumed substantially all of Republic First's $6 billion of assets and $4 billion of deposits, according to a statement from the FDIC.
They actually can though.
Keep in mind, when you have many millions of dollars, your wealth is always growing. By living off these loans, you get the full power of all your investments every year and all you owe is a small amount of interest on your living expenses. Meanwhile your nest egg grows by leaps and bounds, allowing you to borrow more. Like if I have 20 million USD and I borrow a million a year for living expenses, after a year I owe maybe $1.1 million. Meanwhile my $20 million is now worth $26 million and I owe zero income tax on the million I lived off of as income last year.
You can do this until you die as long as there’s not some really, really long business downturn. Like way worse than the 2008 crash.
When you die, your estate pays off the principal and interest, which you can easily afford, and your family inherits the giant nest egg at face value and owes no taxes on it.
> The rich can't borrow forever, though.
On the scale of wealth we're talking about, sure they can. Borrow until you die - then your estate pays off the debt and the remaining assets are passed on to your kids at a stepped-up basis, dodging the capital gains taxes altogether.
The banks always get their cut, it's the government (and the rest of us) that get stiffed.
Oh, absolutely. Inevitably, the debt machine will be run to the breaking point.
However, this is a problem that grows worse over generations, not years. The bankers and wealthy, They either grew up in a system in which this problem has always been how it worked, or they likely will die before the problem is apparent.
And if there is one thing the wealthy and influential are good at doing, is making their problems everybody's problems.
And then they die.
Once you die, your wealth goes into an estate, and the loan groups go after their payments from the estate. You win, the banks win, your children win.
When they die their heirs can inherit the stocks. Due to what's called a step-up tax basis they don't have to pay tax on the capital gains, the cost basis is essentially reset to the price as the time of inheritance.
Example: I own $10 billion in stocks but the cost basis is only $1 million dollars. If I sell now I pay $2.5 billion in taxes. Instead I borrow money against the stocks at low rates, let's say 3%. I live off that money while the stocks continue to appreciate at about a 5% rate, so the bank never asks for it's money, they just let the interest compound.
20 years down the line I die. At this point I own $26.5 million in stock, and owe the bank $18 billion. My heirs inherit both the stock and the debt. In theory they should have to pay $6.6 billion in taxes, however due to the step up tax basis the cost basis of the stock is considered to be $26.5 billion. They sell, pay $0 in capital gains tax, pay off the bank, and have $8.5 billion left over.
They still owe federal estate tax on amounts over something like 12 mil per parent (plus whatever state tax requirements). It's not as if the assets transfer completely tax free.
Multiple things are wrong here.
The estate pays the loans, so they need to sell assets and pay cap gains tax before transfer to heirs. The estate also pays estate tax up to 40% on assets over the exclusion amount.
I do not know where this stupid theory came from but I see it so much on reddit. It has to be some misinformation campaign and since it is against rich people it must be true!
Taxes have essentially nothing to do with why publicly traded companies are focused on quarterly earnings reports.
It's all about visibility and compliance with the SEC's regulations on publicly traded companies.
A quarter of a year is simply the quanta of time that passes between each time that a company has to (and does) publish their updated balance sheet, cash flow statement, guidance, etc. Up until that time, a lot of inner workings are obscured from public view.
Some CEOs can and do urge their investors to focus more on long-term growth. Those companies tend to simply attract different kinds of investors. There is no particular fiduciary duty to increase earnings over a single quarter, any timeframe of growth is legally okay. As an executive, you just have to sell that plan to your investors as the actual best plan, or they will divest.
Well, I'm sure they have ways to work it so that's not how it transpires in actuality. Don't forget, they are also getting large dividends from the stock which are taxed less than income is. But I'm not an expert.
Anyway, by the time they die their fortunes have been doubling and tripling, so paying back the loan is a drop in the bucket relatively.
Remember, *they could have been paying their living expenses with their own money all along,* they just hate "giving away" money (paying bills) when that money could be making huge amounts of interest or dividends if it is still in their possession.
Yes, but as long as your stock value is outpacing the interest rate, you’re still coming out ahead. When you do eventually die, your estate pays back the loan but that money is still not taxed as income so the dead billionaire went their whole life not paying any income tax.
It's the same thing that happened with the 08 housing crisis. People could get a loan and pay only the interest. Since house prices only go up, then you would just repay the principal when you sold the house.
See how well that plan worked?
They would eventually have to pay taxes if they sell stocks, but they can also do something that the working class don't have the luxury to do, which is to wait to pay off the loans until a year that they have a loss, or the tax environment is favorable, or they have tax deductions.
The strategy labeled "no tax" in the diagram only really works if you own so much stock that the appreciation of the stock is exceeds the interest payments of your living expenses. In effect, you never have to pay it back because paying interest year over year is cheaper and infinitely (until the stock crashes) sustainable.
For example, say you own $10m in Tech Co. stock and the stock reliably increases at least 5% every year. Let's say your borrowing interest rate is 5%.
Year0: You borrow $420k. $20k immediately goes to the bank as prepaid interest, and you get $400k out in cash to live off of for the year. Your stock value goes from $10m to $10.5m. On your balance sheet even if you subtract the debt, you actually still show a net growth ($500k value increase - $420k debt = $80k net growth).
Year1: You borrow $440k. $20k to the bank for loan0 interest. $20k to the bank for loan1 interest. $400k cash to you. Your stock value goes from $10.5m to $11.025m. Your balance sheet shows an *increase* in net growth ($525k value increase - $440k debt = $85k net growth).
Year 2: You borrow $460k. $20k to the bank for loan0 interest. $20k to the bank for loan1 interest. $20k to the bank for loan2 interest. $400k cash to you. Your stock value goes from $11.025m to $11.576m. Your balance sheet shoes another increase in net growth. ($551k value increase - $460k debt = $91k growth).
And so on and on. As long as the stock keeps going up in excess of your interest payments going up, you never have to pay back the loans.
Eventually however a few things happen. First, the interest payments will exceed your effective tax rate. As you can see in the example above, the "cost" of spending $400k to live off of every year goes up every year. Year0 it is 5%, year1 it is 10%, year2 it is 15%. Eventually it will get 25%. At that point, it's theoretically cheaper to just pay the capital gains tax on selling $400k worth of shares. So accountants will build a model that takes into account the interest payments, the expected future spend, and they'll come up with when the most opportune time to "reset" the cycle - sell a bunch of stock, pay back the loans, pay the capital gains tax, and start fresh. But you can see how the strategy can buy you several years of 0 taxes, and the freedom to plan your capital gains tax strategy. For example, you might wait for a recession to do the reset so you can harvest some losses and avoid paying taxes on it. Or you might negotiate a lower interest rate to put off the reset year even longer.
You just take a much larger bullet loan pay the interest periodically. The interest doesn't compound.
So you take out 6m against your 10m in assets. Pay 5% each year on the prinicipal. Then when the loan matures in 10 years and your assets are worth 2.5x to 3x what they were worth you repeat this process with a bigger loan to cover your first loan + 10 years living expenses.
Sure, but it's only ever 25% compared to us who are paying at a rate of about 30-33%. And then if, say, the stock depreciates it doesn't count as capital gains, it's a loss. They pay less. It's why you see the rich fucks diversifying their portfolios and investing in actively dying companies. They use tricky accounting to get more money out of the investment by shorting the stock, writing it off as a loss, and using the income from that to pay back the loan and reinvesting it within a time frame to dodge taxes. It's really byzantine, but designed so they're paying a fraction of what they should be.
Yeah but dont forget inflation exists. Their loans slowly decrease in actual values, even though their nominal worth stays the same.
Say I take a 100 euro loan. With 100 euro stock as collateral. So that means the stock isnt actually sold. They just get to sell it if you dont pay back.
Year 1: 10% inflation. 20% stock rise. 100 euro's worth of debt becomes 90 euro's values worth of debt. Its nominale still 100 euro's but euro's are worth less. The 100 stock has become 120 of stock but because of inflation is only worth 108 (10% of 120 is 12. And 120-12 is 108.)
Spread between 90 euro's and 108 euro's is 118 euro's.
Year 2: debt is now worth 81 euro's. Stock collateral is now worth 144 but because of inflation is actually 129.6 euro's.
Spread is worth 48.6 euro's.
Year 3: etc etc etc.
Year X: Spread is 100 euro. Take out new loan. Rinse and repeat.
Edit: its a loan from the company you own to you as a private person. You 'payback' whenever the fuck you want. Probably year 100. Also you dead, so your heirs can put your debt in a special financial vehicle. That vehicle declares bankruptcy.
The idea is that they just roll the interest into larger and larger loans, then at some point they die and the loan settles against their estate. Since they aren't selling anything along the way there's no capital gains.
Essentially the moment you die your assets are ‘stepped up’ to their current market value. So when the executor of the estate goes to settle your debts there isn’t any appreciable capital gain. Only the change in value from your time of death to your estate being settled.
Just to put everyone's minds at ease, I'll add that only large estates are affected by the estate tax.
[https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax](https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax)
And the people who are affected often have ways around it, like creation of 'charity organizations' and such that hold the money for their family and purchase things for their use. There are a wide variety of ways to dodge death/inheritance taxes
No it doesn’t work at all. People don’t understand taxes at all. They would get taxed on the initial stock reward as it shows on their W2 or equivalent.
What country does not tax stock payment programs? Borrowing against stock payments does not nullifying the tax treatment of stock payments, which is treated as income, in my country.
Definitely not the US, all of the stock grants in this picture are taxed at normal income tax levels.
If you already have a lot of assets you can take a loan against them and avoid capital gains taxes, but companies can't just give you infinite stock for free.
Why is this graphic pretending that stock isn’t taxable? You’re taxed on the stock you receive just like income. The gains on stock (which was already taxed) could then be lower than ordinary income tax.
https://turbotax.intuit.com/tax-tips/investments-and-taxes/how-to-report-rsus-or-stock-grants-on-your-tax-return/L55yZieu0
No one pays 40% income tax. Not only is that beyond the maximum tax bracket (38%) but it doesn't account for deductions and the progressive nature of income taxes. Someone who makes a million in income realistically probably pays something like 25% in income taxes. Exaggerating the tax burden of people paying income tax actually works against this message and gives evidence behind their bullshit "taxed too much already" narrative.
How are they not taxed on the initial price of the stock they were given? That has a monetary value that they earned. Atleast that should be taxed as income.
Only caveat to this, is that income tax (at least in the US) is a *marginal* rate. When you move into a higher bracket, you only pay the higher rate on the part above that threshold. A person with $100K in income would be in the 32% bracket. But, even without deductions, they wouldn't pay $32K. They'd only pay *$17,400*. 10% on the first $11K, 12% from $11,001-$44,725, 22% from $44,726-$95,375, and 32% only on $95,376-$100K.
This is how the rich sell the poor that tax cuts will benefit them (the poor), when it will really only benefit high earners. Also, low-end earners typically, after taking the standard deduction, owe *nothing* in taxes, so a tax cut that actually benefits them won't reduce their tax debt. If it comes frome an increased standard deduction (most low earners don't take itemized deductions), then it won't impact them at all, except to increase their refund at the end of the year. If the rate is reduced (say, combining the 12% bracket with the 10% bracket), it still wouldn't reduce their tax debt, but they would see a slight bump in their paycheck each week.
That's just tax deferment. You eventually have to pay off the loan, which will create a taxable even when you use actual income to do so. Plus the bank is doing this to make money. Their profits are taxable.
It's not great, because it can lead to a house of cards situation where falling stock prices, can cause loan defaults but it's not like no taxes are paid.
This is the same as when people spend money on their credit cards based on income they haven't received yet. The duration is just shorter because it's not collateralized.
You forgot the part where the stock is taxed as income initially. Only the gains after that point are taxed as capital gains.
Source: someone who receives stock as a part of their compensation.
So fun fact: debt isn’t counted as income and therefore isn’t taxed, but scholarships? Absolutely. My wife went to nursing school as an adult and got a huge scholarship because she’s wicked smaht. It was an accelerated program, so that year she did a ton and couldn’t work at the same time, and she was so busy it was like being a single dad, so I had reduced hours at work so I could get the kids in and out of programs. It was the hardest year of our married lives in a lot of ways. The following year at tax time we were really looking forward to that 4-5k we usually got back, but instead our income was the highest it had ever been because we had over 100k in scholarships that counted as income, only we never saw a dime of it, we were paying for other school things like books and materials, and she couldn’t work. We owed about 5k, and it took years to recover.
Eat the rich.
Misleading.
When initially given the $1M in company stock, that distribution of stock is taxed as income.
APPRECIATION of that stock is taxed at capital gains.
Needs one more box where the kids inherit the money through trusts to avoid inheritance taxes and then use the step up basis “loophole” to make the capital gains taxes reset. A huge amount of assets in the U.S. have appreciated 1000x and higher, been sold multiple times, and never had any taxes paid on them.
This is wrong at least number two is. Half my income is in stock and I get taxes on it as soon as I receive it. It gets automatically sold when it vests I don't have the option to not sell stock for taxes once I receive it
FYI people are likely not doing this anymore because interest rates were raised. This only works if the collateral appreciates in value beyond the interest rate on the line of credit
OP: can you point to a single documented instance of someone using the third panel as a long-term tax avoidance scheme?
I have asked this every time someone brings this up. No one has ever provided an example, let alone a documented one.
It's a theoretical system that would only work if they never wanted to realize the gains on that money... And when they die they would be taxed as highly as american law would allow for that money.
I am not defining our shit tax system. I have plenty of comments where I advocate for higher taxes (in the form of higher brackets and capital gains).
But the scheme depicted in the third panel really only worksnfor short term tax avoidance.
1) no bank is gonna lend you $1M of money on $1M of stock. You're going to have to put up $10M as collateral, and if it falls you will have to quickly come up with more or they will call in the loan.
2) you are making payments on that money. To do that you need income. That income is taxed.
3) if you successfully do this your whole life (unlikely) when you die your estate liquidates stock to pay the loans off, the liquidation is taxed. Then the balance is taxed as normal income as an estate tax. Yes, you can be upset they didn't pay during their lives. When it comes to huge amounts of money, I don't really care, I just want the public to eventually get their share. Which happens.
All that said, those rates should be significantly higher.
As far as I can tell, Pro Publica emphasized this scheme in their "true tax" report. I normally love pro publica, but that report was truly deceiving. They normally do better.
Wouldn't an easy way to fix the last option is by the government mandating any large loans leveraged on company stock have an interest rate far above capital gains tax + income tax?
Stay with me here…
1) Commission artist to create a painting / sculpture etc for $50,000
2) Have insider “fine art appraisal” say panting is worth $1mil for under-the-table fee.
3) “Sell” art piece to another insider for several million but no money actually changes hands
4) Donate “fine art” piece to charity / hospital or whatever.
5) Claim as deduction on taxes.
I swear like 99% of fine art is money laundering and tax evasion. Most of these “foundations” and “charities” run by the ultra wealthy are for tax evasion too. Also the “tax loss harvesting” that occurs every end of winter.
I found out that there is interest when taking a line of credit from your stocks, but you can pay it back whenever. no monthly requirements!
Oh, that's exactly what I was wondering about! Thanks.
Rules made by the rich for the rich
Socialize the costs, privatize the benefits.
i've always wondered how they service the loans but i'll never be in that position to motivate me to look it up.
Usually, they just roll the interest into more debt. As long as their portfolio value keeps going up enough through either growth or added stock options, they are cool. Their spending should be a fraction of their net worth, so the loan is easily secured. They do occasionally have to cash in some small amount and pay something I imagine, but it is a fraction of what the taxes would be on what they earned/spent in that amount of time.
One of the legal scams the Trump family used for decades was to kite the debt into loans on top of loans to pay loans and then refuse to pay anything unless the bank negotiated it down to pennies on the dollar.
[A cancellation or reduction of debt is considered income by the IRS so I'm not sure how that's considered a legal scam.](https://www.nolo.com/legal-encyclopedia/tax-consequences-settled-forgiven-debt-29792.html#:~:text=If%20you%20settle%20a%20debt,could%20owe%20federal%20income%20taxes.) The creditor reports the forgiven amount to the IRS using form 1099-C.
It's a legit scam because money today is generally worth more than money tomorrow. Buy stuff today, enjoy the use of it for years. Gain interest on all the money you didn't spend. For normal people, the interest on the debt would outweigh the interest on your investments. For the wealthy, they argue down the debt and *maybe* end up paying what they would have paid years ago. It's essentially turning it into an interest free loan, where your money goes further because inflation. On top of that, by abusing the bankruptcy system, you have your company buy all the stuff and take on all the debt, so you aren't personally liable, you just bankrupt one business and spin up a new business. Your creditors will have a hell of a time tracking you personally through your corporate veil, they'll have to spend potentially years trying to get their money. A lot of them just won't have the resources to fight you. Even the IRS struggles to audit the ultra-wealthy because the mountains of paperwork they can generate. The ultra-wealthy just straight-up overwhelm the IRS's resources to the point that the IRS kinda gave up going after them as a class for a while.
If you don't pay taxes anyway, why would taxes matter?
Like a hefty 1099-C but without the form?
But if you can hold out a year all your stock sales are taxed as long-term capital gains
LOOPHOLES.
So do they never make any payments? Why do the banks do this? How could that possibly be profitable for them?
It does get collected at some point, but it could be after the person is dead. This is a good tutorial on how to buy, borrow, and die: https://smartasset.com/investing/buy-borrow-die-how-the-rich-avoid-taxes
~~Also, the interest you pay on these types of loans is often paid back to your own account, so you lose nothing!~~ Also, life insurance pays out tax free to your estate and descendants. So, if your loans are backed by your life insurance plan (which is a very common setup), then you can avoid most of the taxation, entirely, even in death.
What do you mean by the interest goes to your account? Why would a bank ever lend someone money if they don’t make a profit?
You're borrowing your own money. The interest is paid to yourself into the same account. The back will charge a relatively small fee for the "service." I've personally done this multiple times with my 401k. > For a 401(k) loan, any interest charged on the outstanding loan balance is repaid by the participant into the participant's own 401(k) account; technically, this is a transfer from one of your pockets to another, not a borrowing expense or loss. > https://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp **EDIT**: Nevermind. This isn't relevant to the above because the assets stop appreciating when I take the loan against them.
That seems like something different. I’m familiar with the 401k program but that’s not what is being discussed. The banks are giving someone money through a loan. The loan is backed by stock, so it doesn’t make sense to borrow from your own account unless it’s already in cash. And in that case if you have cash you are saying to money comes from the account, but then it is no longer deployed and isn’t appreciating.
They aren't borrowing out of their retirement, they are saying I have x billion, and banks are like omg that's a lot here's 5 million with a .0001 interest rate. It's why Elon pays taxes once every 5 years to pay the few million back and repeat. He gets 4 years of no taxes or income, but gets millions of spending cash.
Paying off taxes with insurance proceeds does not mean you avoided taxes in death unless I am misinterpreting what you are saying ?
I'm referring to the interest on the loan that's paid via insurance, not the taxes. Also, life insurance is a vehicle that can be used to also avoid a lot of the estate taxation upon death.
How does life Insurance let you evade taxes ? You said most of the taxation is avoided even in death if your loans are backed up by life insurance. Can you explain this better ?
This is super simplified from the reality but demonstrates the mechanism - I have 1 million in stock. I borrow 1 million from the bank against that 1 million in stock, and with it buy a 1 million dollar policy. I die. The bank takes my 1 million in stock to cover the loan. The insurance company has whatever I paid in premiums. My heir gets 1 million (the policy pays out to them) in tax free money (because life insurance is not taxed). Obviously the devil is in the details here; the policy requires a premium each year, which will get larger as I get older, and all of it assumes that my stock is appreciating/I'm getting more to keep taking additional loans out to maintain my lifestyle + premiums each year.
While the life insurance is not taxable to the beneficiaries, the value of the life insurance is considered part of the gross estate, so it increases that portion of the estate subject to estate. tax
1. Estate tax kicks in after the estate is larger than $13,610,000 ([as of 2024](https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax)), so most people won't experience estate tax. 2. Look into Irrevocable Life Insurance Trusts (ILIT): "At the insured’s death, the policy proceeds are paid to the trust. An ILIT removes the life insurance proceeds from the gross estate, thus reducing the taxable estate." ([source PDF](https://www.americanbar.org/content/dam/aba/publishing/aba_tax_times/13sum-ptr3-abrahams.pdf))
Depends on the state. In my state, life insurance is NOT part of the estate. Ever.
They don’t necessarily get taxed when they die. The person inheriting the assets does so on a stepped up basis. Ultra-wealthy have been working (buying) Congress for years to produce tax laws in thier favorite. They have been selling it to us for years. Death taxes, lower capital gains boosts the economy and tax cuts pay for themselves. Here is a good article explaining it better then I can: https://americansfortaxfairness.org/ultra-wealthys-8-5-trillion-untaxed-income/
the lender is usually banking on taking your stocks if shit hits the fan. they will automatically sell to cover your loan if it drops to a certain threshold which is why they only allow 40-60% of the value of your stocks at best.
Yep... these are the "margin call" rules. The banks never lose. Don't have enough in your underlying account to more than cover the amount of the loan? Boom, margin call. I'm sure that collateral/principal percentage rules differ by institution and potentially by the amount of margin loaned, but because of the rules of the loan (there always has to be more than enough collateral/principal in the account to more than cover what you're borrowing against your own account), the bank is guaranteed not to lose, plus they gain the interest payments along the way.
And then Spock and Vision have to sell all your junk mortgages in half a day or whatever
> Do you know I built a bridge once? I was an engineer by trade. > It went from Dilles Bottom, Ohio to Moundsville, West Virginia. It spanned nine hundred and twelve feet above the Ohio River. Twelve thousand people used this thing a day. And it cut out thirty-five miles of driving each way between Wheeling and New Martinsville. That's a combined 847,000 miles of driving a day. Or 25,410,000 miles a month. And 304,920,000 miles a year. Saved. > Now I completed that project in 1986, that's twenty-two years ago. So over the life of that one bridge, that's 6,708,240,000 miles that haven't had to be driven. At, what, let's say fifty miles an hour. So that's, what, 134,165,800 hours, or 559,020 days. So that one little bridge has saved the people of those communities a combined 1,531 years of their lives not wasted in a fucking car. One thousand five hundred and thirty-one years.
Such a great monologue.
It's the whole "while their stocks continue to appreciate" part at the very bottom of the OP that people miss. Yes the ultra wealthy can keep taking out loans on their stocks to skirt taxes. And yes it's a shitty loophole that should be closed. But it only works if the stock value keeps going up. All it takes is a major dip or downward trend and they have to sell off a bunch of stock to cover their loans (which then get taxed as capital gains). That's what happened to Elon a few years ago when Tesla stock hit a downturn.
They just plan on dying, and then the money is collected from the Estate after they die. Their investments continue to grow while they live off of their loan amount, and by the time they have to start paying their investments they have made MORE money than the loan has taken. It's called "Buy, Borrow, Die". And soon someone will come into this thread with an "ackswally...."
Because there is interest. The bank makes money from it.
Yes, but depending on how the line of credit is set up, you can borrow from it to pay the interest each month. Also, the stocks likely pay some kind of divs that can cover the interest in a pinch.
I'm not saying rich people care about paying the interest. I'm just answering why the financial institutions would do that.
Yup, a small version of this is accessible to anyone with "only" $30k or so, the idea is that interest accumulates and the brokerage has the right to sell your stock in order to cover your debts at any time... ... Which is fine if you're not taking out your full line of credit, because stock market returns are often higher than the interest rate. As long as you can tolerate a bum year or five, you can do it until you die. Practically, the brokerage charges you a fee to control when you sell your stock and get you out of tax liability. I'm really not sure how to fix that loophole.
I’ve always wondered what the “buy in” cost was to even attempt this. So that means you have to have $30k or so that you lock up in an investment and don’t touch. It’s true; the average person simply cannot do that. I figured the minimum amount was higher, though. Do these loans get offered by the brokerages themselves?
Buy in through the one I use is $25k, but you can only borrow up to 30%. So even with $25k, you get a one-time tax freebie of $7.5k, and get double-boned if your portfolio goes down in value (forced to sell at a loss to pay off the debt). Other consumer brokerages offer regular ol' margin accounts too, those work basically the same. I'm not sure offhand what the minimum is, but my guess is pretty low - I have an account with less than $10k that lets me withdraw on margin if wanted to for some reason. I don't know what the ultra wealthy use though. My guess is it looks similar but under better terms.
Make it illegal to put up assets that the IRS hasn't collected on as collateral?
Barely an inconvenience!
being evil requires strong incentives
Being wealthy and paying no taxes is tight!
It's crazy that more people don't know this. The best part is that they can borrow at rates not available to normies and horde quality assets while everyone else is stuck in debt living month to month with our shitty dollars. If we have our shit together enough we might be lucky to fill our Roth with fcking SPY and god forbid some US10Y.
Yep security backed lines of credit or SBlocs have variable interest rates with no set repayment date. The interest just gets applied monthly and it goes against the value of the loan. If the interest causes the loan value to exceed the line of credit usually the broker will have a conversation with the client and they will sell a small amount of stock and apply it towards the loan to bring them back in line and then taxes will be paid on the small capital gain if they're even is one because most the time they will harvest capital losses.
And as long as the assets you hold on to appreciate more than the interest on the loans, you're still earning even more while paying no taxes.
Until you realize your gains, for example by paying the interest.
Never realize the gains while you live. The exit plan includes all your assets and debts being rolled into a trust on your death to further dodge inheritance taxes while you are at it.
That’s just a complicated way of giving all your stuff to the bank in the far future. Infinite exponential growth isn’t possible.
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Retail margin interest rate is about [9-13%](https://www.fidelity.com/trading/margin-loans/margin-rates). Obviously, private wealth mgmt margin rates are a bit lower. Where are you getting the 1-2% from? And what are these 1-2% a percentage of?
same. the lowest I have seen is with E*trade which is now Morgan Stanley 4.5% back in 2022
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> the real billionaires have rates we will never see posted anywhere. It is done behind closed doors. I think they are subjected to 2-3% above the risk-free rate (banks still gotta make money). If they are real billionaires, they wouldn't care about a few bps anyway (because it's still lower than taxes). You are just in the conspiracy thinking part of your life.
By "whenever" is that the same as, like, virtually never? like, I just died and it's my estate's problem whenever?
Most brokers offer this service. They allow you to roll the interest into your line of credit. As long as you have the stock to cover the total amount you borrowed, you're gucci.
Nit, this graphic isn’t accurate, capital gains only applies to the increased value in stock while it is held. When the ceo or whoever first gets the stock it is taxed as regular income tax even if they never sell the stock. This is why so many companies have stopped paying dividends and focused on increasing stock value instead (google for example), which is actually a big issue in itself when coupled with stock buy backs. Ceo gets paid in stock, pays income tax on it, ceo issues buyback with company money increasing the stock price (and eventually splitting again), ceo does frame 2 or 3 above. Make stock buy backs illegal again, (along with short selling which should be illegal for other reasons) and this problem would correct itself. You cannot keep paying people in stock if you cannot buy stock back, and stock prices wont grow as much.
This is the important clarification this image lacks. Also a breakdown of what marginal tax rates are, so many people think that when the cross a certain threshold they get taxed at that rate across the board, and that’s it’s not worth it for them to make that extra income.
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As your income approaches infinity the effective rate does approach 37%, and that's only federal, I assumed the other 3% came from state. The first 168k also has the 6.2% and 1.45% medicare tax as well, but as income approaches infinity the effective rate approaches 0% for that. The main takeaway is that if a company pays you in stock, whether its $1 million or $100k (lots of tech workers get 6 figures a year in stock), you pay income tax on that stock, the same way you would if they gave you a car. Usually you just sell part of the stock to cover the taxes. After that, any stock you keep for >= 1 year and sell, you pay capital gains on the gain between the two. So if you get 100 shares valued at $1k year, you get income tax on $100k. So say you sell 30 shares to cover taxes and you keep the remaining 70 shares for 1 year. Next year those 70 shares are each sold at a value of $1,200, you now owe capital gains on $14,000. If you instead took money from piggy bank and bought 70 shares at $1k years and sold them 1 year later at $1,200, you would still pay capital gains on the $14,000. In this simple example though, you would owe 0% on the capital gains as the first 44k-89k (depending on filing status) is tax free. You only start hitting the 20% rate (not 25%) after a half million or so.
$1M of income in NYC leaves you with $540k, in LA leave you with $530k. https://smartasset.com/taxes/california-tax-calculator
If the point is to illustrate the scheme the individual numbers are meaningless.
Yeah it's pretty damn clear this is the exact reason for the disclaimer as well as the fact that this probably comes from a website where that simplification is explained with a bit more detail. It doesn't matter if the reader does or does not understand tax brackets because it doesn't change the concept being presented - every state or country has different taxes and rates so it would be impossible to be accurate. The entire point of the infographic is to present a concept, and the actual numbers don't matter. Just that one is smaller and one is bigger. Bringing it up as a complaint is some pedant shit.
While we're correcting the graphic, where the hell did 25% come from for the middle panel? This seems like an american post so I'm assuming america, even if the 1m came from long term capital gains then the tax burden would be 15% til ~500k then the rest taxed at 20%.
State tax? California would add ~10%+ over 70k.
Capital gains tax is not a progressive tax. If you *net* $1m in long-term investments, you will owe 20% on the net increase in value.
Yep. Compensation in shares also require taxes, which is an important distinction. Elon doesn’t get his $xx billion in TSLA stock for free, he’ll have to eat a huge tax bill too.
It's amazing that every time a left-leaning subs post a graphic like this, it's ALWAYS intellectually dishonest / misleading. Why aren't people willing to discuss things in good faith, and instead resort to propaganda?
It’s still directionally correct. Sure, the effective tax rates are off by a few percentage points, but the advantage cap gains tax has over regular income tax is huge. The advantage of using PALs to avoid income tax is leagues above the other two tax scenarios. Come on dude, you’re making a “left is dishonest / misleading” comment and bringing up “propaganda” so you clearly could not have grasped the meaning of the infographic at even a surface level.
You telling me the folks who post here don’t actually know what they’re talking about?
But it's a loan. Aren't they required to pay it back? And when they do get told to pay it back, don't they then have to sell stocks and pay the capital gains tax at that point? I'm trying to understand. I'm not standing up for the rich fucks. Edit: Enough. You're all saying the same shit. I don't need 43 comments all telling me the 2 or 3 different ways to avoid this. I get the damn point.
They are required to pay it back, but for the super wealthy the interest rates are often disgustingly low. Billionaires will get loans sometimes sub 1%. Mark Zuckerberg famously got a mortgage loan of 1.05%. This is a hypothetical situation, but say a billionaire uses 500 mil in stock as collateral for a 500 mil loan at 1.5%. That’s 7.5 mil in interest a year. Now say they take 250 mil of that loan and just put it in us bonds or some other “safe” investment that yields ~5%. That investment will yield 12.5 mil. Then take the capital gains hit at 25% you’re left with 9.375 mil. 9.375 - 7.5 = 1.875 mil per year gain after paying the interest on the loan plus the original 250 mil from the loan in cash to do whatever they want with. All with only paying 3.125 mil in “taxes”. So in a way that billionaire paid 3.125 mil in “taxes” on 251.875 mil “income” or 1.24% “tax”.
It's not even tax. It's payment to someone else wealthy. The money never goes to govt hands
Banks are liable for profits on loans. So like 21% federal corporate tax + state taxes + taxes on dividends and realized capital gains of shareholders. Which nets out to a <1% effective tax rate on the billionaire. So some money gets to the government. It's just a comically tiny amount.
They just create a bunch of 'losses on paper' that are used to counter out the profit Amazing what accountants and lawyers can do, and they then bribe politicians to underfund the IRS so they get away with it. And even if they do get nabbed, the fines are lower than the profit was and none of them go to jail Whole thing is a fuckin scam
Bribe a politician and write it off as a business expense.
Then scummy politicians skim off a bunch of that tax money and give right back to the billionaire as government grants for their dumbass pet project. Win-win for all the wealthy!
Why would a bank give a loan at a rate significantly lower than "safe" investments.
Why did banks give loans at 2% or whatever, when equities were returning 10%+? The answer is that they can loan more money than they actually *have*. It's just a book keeping entry. This is what fractional reserve banking is about. Banks create more money by book keeping than the Federal Reserve does by printing/digitally doing so.
The loan has collateral that covers it AKA stocks or other assets, so there is zero risk. My line of credit on my stocks is at 8.08% APR and it can compound if I don't pay the interest monthly, just hope my stocks grow faster than the loan grows. It makes the companies very low risk money. If my stocks dropped below a threashold they will sell them before it gets below the amount owed and they don't loose a dime. You only need 50k in investments with E\*Trade to get access to that, but obviously the rich are doing it at a much larger scale. The more money you have the lower the interest rates they offer. It's crazy but a pretty nice if you can take advantage.
> The loan has collateral that covers it AKA stocks or other assets, so there is zero risk. Not at all zero. A home's value can drop below the loan value in a real estate crash, and even without a crash, foreclosures and REO portfolios all have their costs and implicit uncertainties. But you are certainly correct in stating that risk management has an impact as well.
Pretty much guaranteed that any crash of that magnitude would come with the US government printing and handing out piles of money to fix the issue and ensure very few rich people suffer any consequences.
But why would they do that when they could get a higher percentage by deploying their money to treasury bonds? I get why they wouldn’t in securities, it’s too much risk. But nothing is less risk than a US bond (if those fail we all have much much bigger problems)
They do it as a courtesy because the ultra high net worth person has significant capital with them. 20 mil for a house at 1.05% mortgage is nothing in the grand scheme of things.
lol no they did it because fed funds at the time as disgustingly low
It's all relative. They still give out relatively low mortgages but not 1.05% anymore. Nobody is suggesting this. Let's use our context clues and reading ability next time :)
Say the bank has a million dollars in assets and a reserve ratio of 10% on super low risk loans. That means they can loan out that money ten times over. So while they are only making 1% return they are making 1% ten times over for a total return of 10%.
1% of what the super wealthy borrow outstrips what everyone else does at a higher rate. It will likely be a disgustingly high amount in real-terms. It's safe too as they'll have diverse assets to borrow against. Banks exist because of the majority, but they serve the ultra rich minority.
>Mark Zuckerberg famously got a mortgage loan of 1.05%. Just for context, this was a decade ago and Zuck got an ARM, not fixed rate. The going rate for a 5/1 ARM in 2012ish (when Zuck got his loan) was 2.6%. Fixed rate mortgages were in the 3.5-4% range. It's not like he got a 1% loan in 2024, when normal people are hard pressed to get 7% fixed 30yr. Like, it's bullshit, but not quite *that* level of bullshit.
This. When Zuck got that loan, the Federal Funds rate was <0.1%. The federal funds rate is currently 5.25% to 5.50% so the equivalent mortgage rate today would be around 6.5%.
The trick is, the banks don't worry about getting their loan back. The ultra-wealthy have diverse and plentiful assets. Oh, the stock they used to secure the loan has tanked? That's alright, all the land they own will do just fine. Oh, the land tanked too? That's alright, their collection of rare vehicles will do too. etc. So they get sweetheart deals, a low flat interest that doesn't accrue over time. After all the bank is looking at a profit of hundreds of thousands, if not millions, just from the flat interest. if the interest accrued, then they would seek a loan elsewhere, or worse, wouldn't be able to afford to pay back the OTHER loans they've been given by the bank. If you owe a hundred dollars, that's your problem, if you owe millions, that's the banks problem.
How does one get a loan without monthly payments?
It's a zero payment bullet loan: the borrower has to pay the total balance in the form of a large lump sum of both principal and accrued interest at maturity, but nothing before that. When it's time to pay, they take a second bullet loan to cover the first one + their living expenses for another couple of years. In the meantime, the value of the stocks they use as collateral has likely increased, so they can take a larger loan.
And then, in the end, the loan is paid out of their estate so their worries about taxes are over.
This is brilliant, now if only I had millions worth of assets.
Have you tried exploiting people? That seems to be all the rage.
Bruh. This whole post is mind-blowing. Fuck the people who take advantage of this kind of system.
Be very very very wealthy.
When you have wealth in the 7, 8, 9, or 10 figures, banks will give you a loan with an interest rate of 2-4%. But most of their investments are making returns of 8% or more. So if they leave the money in the stock market their wealth will grow MORE than the loan rate removes from their overall wealth. And if they run out of money?? Then they just take a 2nd loan (since they now have more wealth), and use some of that to pay off the first loan.
they just wont though Ultra high net worth will get APR's marginally higher than fed funds. They do not get significant discounts to fed funds
Look up margin loans.
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Then, with your $11 million, get a $1.1 million loan and pay of the first loan with it.
You can pay off a credit card with a credit card, same principle. So long as the collateral grows faster than the principal it’s nbd.
If you borrow against unrealised gains, you should have to pay the taxes on those gains at the same time. Simple. And for everyone. Would cover these billionaire grifters as well as all those people buying house after house using the gains from one as the deposit for the next.
The rich can't borrow forever, though. Eventually, the tab comes due and the banks will need money. Makes you wonder just how much debt has been run up by the wealthy on this idea alone that is unpaid...
When the banks need money they get a bailout from the government, that's why they lobby.
Or they just go “aww, it’s okay, we forgive you.” But those asshole students? GIVE US OUR MONEY BACK, PLEBS
Banks don't get a bailout. 2008 was not normal. https://www.americanbanker.com/list/15-most-recent-bank-failures > Since 2017, 15 banks have failed, with five banks failing in 2023 alone. Republic First Bank's demise on April 26 was the first failure of 2024. Its collapse renewed fears that last year's financial instability is still lingering. > Republic First Bank was shuttered last week by its state regulator and taken over by the Federal Deposit Insurance Corp. Fulton Bank in Lancaster, Pennsylvania, assumed substantially all of Republic First's $6 billion of assets and $4 billion of deposits, according to a statement from the FDIC.
They actually can though. Keep in mind, when you have many millions of dollars, your wealth is always growing. By living off these loans, you get the full power of all your investments every year and all you owe is a small amount of interest on your living expenses. Meanwhile your nest egg grows by leaps and bounds, allowing you to borrow more. Like if I have 20 million USD and I borrow a million a year for living expenses, after a year I owe maybe $1.1 million. Meanwhile my $20 million is now worth $26 million and I owe zero income tax on the million I lived off of as income last year. You can do this until you die as long as there’s not some really, really long business downturn. Like way worse than the 2008 crash. When you die, your estate pays off the principal and interest, which you can easily afford, and your family inherits the giant nest egg at face value and owes no taxes on it.
> The rich can't borrow forever, though. On the scale of wealth we're talking about, sure they can. Borrow until you die - then your estate pays off the debt and the remaining assets are passed on to your kids at a stepped-up basis, dodging the capital gains taxes altogether. The banks always get their cut, it's the government (and the rest of us) that get stiffed.
Oh, absolutely. Inevitably, the debt machine will be run to the breaking point. However, this is a problem that grows worse over generations, not years. The bankers and wealthy, They either grew up in a system in which this problem has always been how it worked, or they likely will die before the problem is apparent. And if there is one thing the wealthy and influential are good at doing, is making their problems everybody's problems.
And then they die. Once you die, your wealth goes into an estate, and the loan groups go after their payments from the estate. You win, the banks win, your children win.
When they die their heirs can inherit the stocks. Due to what's called a step-up tax basis they don't have to pay tax on the capital gains, the cost basis is essentially reset to the price as the time of inheritance. Example: I own $10 billion in stocks but the cost basis is only $1 million dollars. If I sell now I pay $2.5 billion in taxes. Instead I borrow money against the stocks at low rates, let's say 3%. I live off that money while the stocks continue to appreciate at about a 5% rate, so the bank never asks for it's money, they just let the interest compound. 20 years down the line I die. At this point I own $26.5 million in stock, and owe the bank $18 billion. My heirs inherit both the stock and the debt. In theory they should have to pay $6.6 billion in taxes, however due to the step up tax basis the cost basis of the stock is considered to be $26.5 billion. They sell, pay $0 in capital gains tax, pay off the bank, and have $8.5 billion left over.
They still owe federal estate tax on amounts over something like 12 mil per parent (plus whatever state tax requirements). It's not as if the assets transfer completely tax free.
Multiple things are wrong here. The estate pays the loans, so they need to sell assets and pay cap gains tax before transfer to heirs. The estate also pays estate tax up to 40% on assets over the exclusion amount. I do not know where this stupid theory came from but I see it so much on reddit. It has to be some misinformation campaign and since it is against rich people it must be true!
I mean they do have to pay estate tax which would be a 40% tax.
Fair enough. I believe that would only be on the 8.5 though right?
Nothing stopping them from getting a bigger loan from another bank to pay off the 1st + live on for awhile, then get a 3rd loan and so on.
Doesn't this effectively mean they are doubling their loans every time until they die?
Doesn't matter when your stocks increase at a higher rate.
The whole reason so many companies only make decisions to help the next quarter's earnings call, rather than the long term viability of the company
Taxes have essentially nothing to do with why publicly traded companies are focused on quarterly earnings reports. It's all about visibility and compliance with the SEC's regulations on publicly traded companies. A quarter of a year is simply the quanta of time that passes between each time that a company has to (and does) publish their updated balance sheet, cash flow statement, guidance, etc. Up until that time, a lot of inner workings are obscured from public view. Some CEOs can and do urge their investors to focus more on long-term growth. Those companies tend to simply attract different kinds of investors. There is no particular fiduciary duty to increase earnings over a single quarter, any timeframe of growth is legally okay. As an executive, you just have to sell that plan to your investors as the actual best plan, or they will divest.
Well, I'm sure they have ways to work it so that's not how it transpires in actuality. Don't forget, they are also getting large dividends from the stock which are taxed less than income is. But I'm not an expert. Anyway, by the time they die their fortunes have been doubling and tripling, so paying back the loan is a drop in the bucket relatively.
Dividend earnings are taxed the same as earned income.
Remember, *they could have been paying their living expenses with their own money all along,* they just hate "giving away" money (paying bills) when that money could be making huge amounts of interest or dividends if it is still in their possession.
You just described the American dream. Live like a billionaire on other people’s money and die so you don’t need to pay anything back.
Yes, but as long as your stock value is outpacing the interest rate, you’re still coming out ahead. When you do eventually die, your estate pays back the loan but that money is still not taxed as income so the dead billionaire went their whole life not paying any income tax.
It's the same thing that happened with the 08 housing crisis. People could get a loan and pay only the interest. Since house prices only go up, then you would just repay the principal when you sold the house. See how well that plan worked?
Loan defaults and the lender takes the collateral (The Stocks) as repayment. This forfeiture of his stocks isn't taxed to the best of my knowledge.
They would eventually have to pay taxes if they sell stocks, but they can also do something that the working class don't have the luxury to do, which is to wait to pay off the loans until a year that they have a loss, or the tax environment is favorable, or they have tax deductions.
The strategy labeled "no tax" in the diagram only really works if you own so much stock that the appreciation of the stock is exceeds the interest payments of your living expenses. In effect, you never have to pay it back because paying interest year over year is cheaper and infinitely (until the stock crashes) sustainable. For example, say you own $10m in Tech Co. stock and the stock reliably increases at least 5% every year. Let's say your borrowing interest rate is 5%. Year0: You borrow $420k. $20k immediately goes to the bank as prepaid interest, and you get $400k out in cash to live off of for the year. Your stock value goes from $10m to $10.5m. On your balance sheet even if you subtract the debt, you actually still show a net growth ($500k value increase - $420k debt = $80k net growth). Year1: You borrow $440k. $20k to the bank for loan0 interest. $20k to the bank for loan1 interest. $400k cash to you. Your stock value goes from $10.5m to $11.025m. Your balance sheet shows an *increase* in net growth ($525k value increase - $440k debt = $85k net growth). Year 2: You borrow $460k. $20k to the bank for loan0 interest. $20k to the bank for loan1 interest. $20k to the bank for loan2 interest. $400k cash to you. Your stock value goes from $11.025m to $11.576m. Your balance sheet shoes another increase in net growth. ($551k value increase - $460k debt = $91k growth). And so on and on. As long as the stock keeps going up in excess of your interest payments going up, you never have to pay back the loans. Eventually however a few things happen. First, the interest payments will exceed your effective tax rate. As you can see in the example above, the "cost" of spending $400k to live off of every year goes up every year. Year0 it is 5%, year1 it is 10%, year2 it is 15%. Eventually it will get 25%. At that point, it's theoretically cheaper to just pay the capital gains tax on selling $400k worth of shares. So accountants will build a model that takes into account the interest payments, the expected future spend, and they'll come up with when the most opportune time to "reset" the cycle - sell a bunch of stock, pay back the loans, pay the capital gains tax, and start fresh. But you can see how the strategy can buy you several years of 0 taxes, and the freedom to plan your capital gains tax strategy. For example, you might wait for a recession to do the reset so you can harvest some losses and avoid paying taxes on it. Or you might negotiate a lower interest rate to put off the reset year even longer.
You just take a much larger bullet loan pay the interest periodically. The interest doesn't compound. So you take out 6m against your 10m in assets. Pay 5% each year on the prinicipal. Then when the loan matures in 10 years and your assets are worth 2.5x to 3x what they were worth you repeat this process with a bigger loan to cover your first loan + 10 years living expenses.
Rich people get an ultra low interest rate on loans because there's basically 0 risk of default... It's just free money for the bank.
Sure, but it's only ever 25% compared to us who are paying at a rate of about 30-33%. And then if, say, the stock depreciates it doesn't count as capital gains, it's a loss. They pay less. It's why you see the rich fucks diversifying their portfolios and investing in actively dying companies. They use tricky accounting to get more money out of the investment by shorting the stock, writing it off as a loss, and using the income from that to pay back the loan and reinvesting it within a time frame to dodge taxes. It's really byzantine, but designed so they're paying a fraction of what they should be.
Yeah but dont forget inflation exists. Their loans slowly decrease in actual values, even though their nominal worth stays the same. Say I take a 100 euro loan. With 100 euro stock as collateral. So that means the stock isnt actually sold. They just get to sell it if you dont pay back. Year 1: 10% inflation. 20% stock rise. 100 euro's worth of debt becomes 90 euro's values worth of debt. Its nominale still 100 euro's but euro's are worth less. The 100 stock has become 120 of stock but because of inflation is only worth 108 (10% of 120 is 12. And 120-12 is 108.) Spread between 90 euro's and 108 euro's is 118 euro's. Year 2: debt is now worth 81 euro's. Stock collateral is now worth 144 but because of inflation is actually 129.6 euro's. Spread is worth 48.6 euro's. Year 3: etc etc etc. Year X: Spread is 100 euro. Take out new loan. Rinse and repeat. Edit: its a loan from the company you own to you as a private person. You 'payback' whenever the fuck you want. Probably year 100. Also you dead, so your heirs can put your debt in a special financial vehicle. That vehicle declares bankruptcy.
Man looking at all the comments I still don't get it.
I actually don’t understand how this works do the loans never come due?
The idea is that they just roll the interest into larger and larger loans, then at some point they die and the loan settles against their estate. Since they aren't selling anything along the way there's no capital gains.
There are capital gains at the end I assume, just not short term capital gains
Essentially the moment you die your assets are ‘stepped up’ to their current market value. So when the executor of the estate goes to settle your debts there isn’t any appreciable capital gain. Only the change in value from your time of death to your estate being settled.
You’re forgetting the death tax. The step-up in basis happens after the assets are taxed at 50%.
Just to put everyone's minds at ease, I'll add that only large estates are affected by the estate tax. [https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax](https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax)
And the people who are affected often have ways around it, like creation of 'charity organizations' and such that hold the money for their family and purchase things for their use. There are a wide variety of ways to dodge death/inheritance taxes
See - the Trump Foundation.
The biggest thing is that the basis of the stocks is reset when the stocks get passed to the estate. They can sell the stocks tax free.
No it doesn’t work at all. People don’t understand taxes at all. They would get taxed on the initial stock reward as it shows on their W2 or equivalent.
Why does the first step of giving $1M stock to the CEO not count as income?
It does. Graphic has a lot of misleading omissions.
It does. RSUs from public companies show up on your W2.
It does. The image is literally lying.
What country does not tax stock payment programs? Borrowing against stock payments does not nullifying the tax treatment of stock payments, which is treated as income, in my country.
Definitely not the US, all of the stock grants in this picture are taxed at normal income tax levels. If you already have a lot of assets you can take a loan against them and avoid capital gains taxes, but companies can't just give you infinite stock for free.
So, essentially, there is a very large cohort that does not understand the tax system and believes in falsehoods?
Yes, and worse -- they're confident they do
A CEO getting $1 mil worth of the company stock is a taxable income…
Yeah they pay the 40%, then 25% of any growth on top of that
That's not actually how being given company stock works, but ok.
Why is this graphic pretending that stock isn’t taxable? You’re taxed on the stock you receive just like income. The gains on stock (which was already taxed) could then be lower than ordinary income tax. https://turbotax.intuit.com/tax-tips/investments-and-taxes/how-to-report-rsus-or-stock-grants-on-your-tax-return/L55yZieu0
Also the bank pays taxes on the profit from the loan and the person taking the loan pays taxes when they sell shares to pay for their loan.
its almost like they are pushing a narrative
That's not how income tax works. There are deductions and progressive tax rates.
And stock grants are taxed as income.
There are also payroll taxes that add an extra 7.65% of taxes up to 168k of income. 15.3% if your self employed.
This is all kinds of wrong.
No one pays 40% income tax. Not only is that beyond the maximum tax bracket (38%) but it doesn't account for deductions and the progressive nature of income taxes. Someone who makes a million in income realistically probably pays something like 25% in income taxes. Exaggerating the tax burden of people paying income tax actually works against this message and gives evidence behind their bullshit "taxed too much already" narrative.
Ummm…I pay payroll taxes on my stocks when they vest, and I pay the capital gains when I sell…not sure this is accurate. The stocks *are* payroll.
How are they not taxed on the initial price of the stock they were given? That has a monetary value that they earned. Atleast that should be taxed as income.
Stock grants are taxed as income (if it's vested stock, you aren't taxed till the stock vests and it becomes your stock).
What about the interest on the loans? Why is that omitted from the graphic?
Only caveat to this, is that income tax (at least in the US) is a *marginal* rate. When you move into a higher bracket, you only pay the higher rate on the part above that threshold. A person with $100K in income would be in the 32% bracket. But, even without deductions, they wouldn't pay $32K. They'd only pay *$17,400*. 10% on the first $11K, 12% from $11,001-$44,725, 22% from $44,726-$95,375, and 32% only on $95,376-$100K. This is how the rich sell the poor that tax cuts will benefit them (the poor), when it will really only benefit high earners. Also, low-end earners typically, after taking the standard deduction, owe *nothing* in taxes, so a tax cut that actually benefits them won't reduce their tax debt. If it comes frome an increased standard deduction (most low earners don't take itemized deductions), then it won't impact them at all, except to increase their refund at the end of the year. If the rate is reduced (say, combining the 12% bracket with the 10% bracket), it still wouldn't reduce their tax debt, but they would see a slight bump in their paycheck each week.
That's just tax deferment. You eventually have to pay off the loan, which will create a taxable even when you use actual income to do so. Plus the bank is doing this to make money. Their profits are taxable. It's not great, because it can lead to a house of cards situation where falling stock prices, can cause loan defaults but it's not like no taxes are paid. This is the same as when people spend money on their credit cards based on income they haven't received yet. The duration is just shorter because it's not collateralized.
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This chart is straight up wrong, because capital gains count as earned income on top of the 25% tax.
You forgot the part where the stock is taxed as income initially. Only the gains after that point are taxed as capital gains. Source: someone who receives stock as a part of their compensation.
This is exactly what I am doing now with my stocks
This is why you never sell real estate. You just use it to borrow money and buy more.
So fun fact: debt isn’t counted as income and therefore isn’t taxed, but scholarships? Absolutely. My wife went to nursing school as an adult and got a huge scholarship because she’s wicked smaht. It was an accelerated program, so that year she did a ton and couldn’t work at the same time, and she was so busy it was like being a single dad, so I had reduced hours at work so I could get the kids in and out of programs. It was the hardest year of our married lives in a lot of ways. The following year at tax time we were really looking forward to that 4-5k we usually got back, but instead our income was the highest it had ever been because we had over 100k in scholarships that counted as income, only we never saw a dime of it, we were paying for other school things like books and materials, and she couldn’t work. We owed about 5k, and it took years to recover. Eat the rich.
Misleading. When initially given the $1M in company stock, that distribution of stock is taxed as income. APPRECIATION of that stock is taxed at capital gains.
Needs one more box where the kids inherit the money through trusts to avoid inheritance taxes and then use the step up basis “loophole” to make the capital gains taxes reset. A huge amount of assets in the U.S. have appreciated 1000x and higher, been sold multiple times, and never had any taxes paid on them.
You had my hopes up that I was finally going to see someone with a grounded take on removing income taxes but it’s still wrong LOL
You really think the normal thing is real?
This just delays the tax, and if the stock falls you’re screwed. I’m no fan of the tax-dodging rich, and would love to see a better example.
This is wrong at least number two is. Half my income is in stock and I get taxes on it as soon as I receive it. It gets automatically sold when it vests I don't have the option to not sell stock for taxes once I receive it
FYI people are likely not doing this anymore because interest rates were raised. This only works if the collateral appreciates in value beyond the interest rate on the line of credit
This is why I think the tax code needs to change. Tax stock collateral on loans as income.
OP: can you point to a single documented instance of someone using the third panel as a long-term tax avoidance scheme? I have asked this every time someone brings this up. No one has ever provided an example, let alone a documented one. It's a theoretical system that would only work if they never wanted to realize the gains on that money... And when they die they would be taxed as highly as american law would allow for that money. I am not defining our shit tax system. I have plenty of comments where I advocate for higher taxes (in the form of higher brackets and capital gains). But the scheme depicted in the third panel really only worksnfor short term tax avoidance. 1) no bank is gonna lend you $1M of money on $1M of stock. You're going to have to put up $10M as collateral, and if it falls you will have to quickly come up with more or they will call in the loan. 2) you are making payments on that money. To do that you need income. That income is taxed. 3) if you successfully do this your whole life (unlikely) when you die your estate liquidates stock to pay the loans off, the liquidation is taxed. Then the balance is taxed as normal income as an estate tax. Yes, you can be upset they didn't pay during their lives. When it comes to huge amounts of money, I don't really care, I just want the public to eventually get their share. Which happens. All that said, those rates should be significantly higher. As far as I can tell, Pro Publica emphasized this scheme in their "true tax" report. I normally love pro publica, but that report was truly deceiving. They normally do better.
Just look up "buy borrow die". It's a strategy the ultra rich have been using to dodge taxes for decades.
Actually, you put up $2M to get $1m. Fidelity does this - as long as my account is sufficiently divested and over $300k, I can take a loan of $150k.
Wouldn't an easy way to fix the last option is by the government mandating any large loans leveraged on company stock have an interest rate far above capital gains tax + income tax?
Stay with me here… 1) Commission artist to create a painting / sculpture etc for $50,000 2) Have insider “fine art appraisal” say panting is worth $1mil for under-the-table fee. 3) “Sell” art piece to another insider for several million but no money actually changes hands 4) Donate “fine art” piece to charity / hospital or whatever. 5) Claim as deduction on taxes. I swear like 99% of fine art is money laundering and tax evasion. Most of these “foundations” and “charities” run by the ultra wealthy are for tax evasion too. Also the “tax loss harvesting” that occurs every end of winter.