[mrmcd]

Unrealized capital gains aren't income because I can't pay my rent and buy groceries with Amazon stock. Even if I could once I did it would be realized same as if I sold it for cash, and I'd owe tax.

You could argue that capital gains rates are too low, but that's a different argument than saying stock owners are getting "invisible income".

[rileymat2]

I was under the impression that loans can be secured by stock. Then you don't pay the gains but get the money to spend on rent or whatever.

[hsitz]

Well, yes, and a loan can be secured by a house too, using a mortgage. In fact, millions of people do that to buy their houses. Do you consider the loans people get to buy houses "income"? Of course not, because it's not. Loans are not income.

[ThomPete]

Loans are technically debt but can easily be income de-facto i.e. it can be used as if they are income.

When a bank borrow you money they don't actually take it from somewhere they fundamentally can create it because of quantitative easing pushed by central banks.

The digital monetary system today is a far cry from the gold based system and the ability to use money as if they are income are very real. Money is more a concept today.

[opportune]

Banks creating money is not quantitative easing. This is a misconception you probably got from a vast oversimplification of what QE is. Banks can create money even without QE (and have done so for a very long time now).

https://en.wikipedia.org/wiki/Quantitative_easing

[ThomPete]

I can see how my writing would have been misunderstood so let me rephrase.

They can't do it without the Central Bank and it's the same mechanism as allows for QE. It's only possible in a FIAT based system.

When banks do it it's called fractional reserve banking but the mechanism is fundamentally the same, the ability to "create money".

[opportune]

Fractional reserve banking doesn't require central banking either. It only requires that people accept more abstract forms of money such as bank notes, and that not too many people try to withdraw their money at the same time.

There's no mandate that bank notes need to be issued by a central bank. See the article: https://en.wikipedia.org/wiki/Banknote

[jgalt212]

You are correct sir. I own $10,00 in stock. per reg T, I can borrow $5,000 against it. Now the stock goes on an Apple/Amazon like tear and it's worth $1,000,000. Now I can borrow up to $500,000 against it--that's a lot of rent groceries.

The above assumes you control the shares and they are pledgeable as collateral. It is not easy, but doable, to borrow against RSU's. i.e. you probably need a high net worth/private banker relationship.

[charlesdm]

I was under the impression that per reg T, you can borrow 100% of the equity value of your stock. So if you own $10,000 worth of stock, you can borrow $10,000 against it (but you will get margin called if there's a decline, so don't do that).

You're right however, if you want to acquire more shares using margin, then your equity needs to be at least 50% of the stock value, i.e. with $10k you can purchase (up to) $20k worth of stock.

[sokoloff]

Shorthand: You can borrow 50%.

You can't put $10K into the account, buy $10K in shares, and borrow $10K in cash (leaving 0 net equity in the account).

Your scenario where you can borrow 100% of the value applies only if you apply that 100% to further shares (meaning you buy 2x as many shares and have a margin balance of 100% of your original equity but 50% of the shares' value).

That means you can buy $20K worth of stock using $10K of cash.

[charlesdm]

Interesting. I don't usually use margin since I live in a country without capital gains tax, but if I transfer $10k worth of shares and I want to use it as a line of credit, then I can at most take out $5k (in cash) before getting margin called?

[sokoloff]

Yes and no (mostly yes). The 50% level is the "initial margin" limit (hence the "yes" part) for initiating a loan.

There is a separate, lower limit called the "maintenance margin" limit, which is the equity percentage that you need to hold to avoid a margin call on a held position.

So, if you deposit $10K in shares, they appreciate to $12K, you borrow $6K and then the share price falls back to the original amount, you have $10K in shares, $4K in net equity (40%), but are probably not going to receive a margin call.

Or, if they are worth $10K, you borrow the limit of $5K and the share price falls by 1%, you won't get a margin call there either (on most securities).

[conanbatt]

What happens when you pay up the loan? Can the bank get your shares without you paying tax?

Otherwise its just a collateral.

[charlesdm]

Yes. It's even better than actually selling your shares. If using portfolio margin you can even use more leverage, i.e. you can basically defer taxes in many (not all) cases pretty much indefinitely.

[amorphid]

Why not just sell shares? You may avoid taxes, but you take risk and interest expenses.

[sokoloff]

You might not be allowed to sell the shares per an insider trading policy or per a disclosure policy ("CEO of XYZ dumped 50% of their shares" looks way worse than "CEO of XYZ borrowed $25MM to build a luxury house.")

You might not want to sell shares that you've held 306 days, preferring to hold them an additional 2 months to get long-term capital gains treatment on them.

You might not want to take capital gains (even if long-term) on this year's income tax. Maybe you want to defer it to January; maybe you want to defer it to a later year when you expect to have a lower capital gains bracket or when you expect to be able to avoid the Obamacare surtax on investment income (via repeal or via lower AGI)

You might not want to sell shares if the margin loan rate is lower than your expectation for growth of the shares.

[beagle3]

The first one is likely still illegal under SEC rule 144 - they don't enforce it often, so it isn't very well known, and it's also a little vague, so hard to say whether it applies in this case - but it Might.

[ksec]

Never been to US but everytime i read anything like this it sounds like US has the most complicated Tax system in the world.

And you have to do it yourself!

[uiri]

It links to another article on the same site that basically explains that US macroeconomic measures of Income and Savings ignore capital gains. By transforming the income from profit and dividends into capital gains, the income becomes invisible to economists, politicians, etc who rely upon those measures.

[toyg]

Surely that's a problem with the measurement...? This could probably be fixed relatively rapidly these days, since all money is electronically tracked somewhere. It would certainly be easier than trying to persuade (or compel) every player to file this or that income in a different way "so that we can run statistics".

[kspaans]

Not to mention that anyone who can save money in a savings account is also perfectly able to buy some shares or funds and get capital gains themselves.