[LynxInLA]

In your mind, would it be "truly absurd" to redefine what counts as a realized capital gain? [1]

In my mind, if you take a loan against your equity, you are realizing the current market value. This would be difficult to implement (especially with private companies and options), but it would close a big gap in the tax system that is primarily used for tax avoidance. [2]

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[1] I completely agree that taxing unrealized gains in the current system would be a terrible idea.

[2] The main non-tax reasons I can think of are retaining voting power and cashing out on pre-ipo stock.

[simondotau]

I agree and would support changing the tax code so that using an asset as collateral triggers a tax event. Until then I don’t begrudge Musk’s accountants for doing what the system permits. Borrowing against unrealised gains is common accounting practice; almost certainly done by many wealthy politicians and nearly all super-wealthy people.

[fundad]

Agreed but let’s not think small. The financial burden of paying or avoiding tax can be completely eliminated for people rich enough.

Paying interest instead of tax is only necessary because the anti-tax movement isn’t done. The lender’s income tax is included in the interest.

Tycoons expect to be worth Trillions. The $20-30B in Tesla that he rolled into Twitter was crumbs.

[simondotau]

Hang on, you lost me when you implied that tax would be forever avoided. Either the asset’s value is never realised, in which case they never really did have the wealth, or it is eventually realised and they pay a large tax bill.

[fundad]

Simply put there will never be enough for the anti-tax movement. Funders of the movement through cash or in-kind propaganda activity want lower taxes and would gladly support a zero taxes.

[LynxInLA]

I completely agree. I also don't think it is hypocritical to take advantage of tax "loopholes" at the same time as arguing they should be closed. That is just good financial practice.

[epgui]

Are loans against equity using the full market value of the equity as the value of collateral? I would find that surprising.

[LynxInLA]

I doubt it, but why wouldn't it be close to market value for public companies?

I don't know how it works for the ultra-wealthy, but regular investors can draw a loan against their deposits with securities-based lines of credit (SBLOCs). SBLOCs have a limit smaller than the total value of your portfolio, but your collateral is still the current securities.

I'm mainly spitballing here, but I agree it would be extremely difficult to implement fairly. I just think it is worth investigating.

[epgui]

> I doubt it, but why wouldn't it be close to market value for public companies?

If it's a large amount of shares, there should still be a liquidity discount (not exactly a DLOM, but something like that, because when you try to sell a large amount quickly, you can't get your order filled at the market rates without depressing the market rates).

Plus, as we have just discussed, you can presume that even if the shares are fully liquid, part of the gains (if there are gains) will be taxed, and that's money that might not be available to pay off the creditor.

On top of that, I'd wager that lenders would subtract an additional safety margin for volatility/risk.

I have absolutely no idea, and please don't quote me on this, but it wouldn't surprise me if creditors applied a ratio of at least 1:2.

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Edit: this random website I stumbled upon on the first page of Google search results for the query "using share equity as collateral" (no idea how reliable or representative this is) seems to indicate that a ratio of 1:2 (they say "50%") is applied. They also say that you could expect to pay about 1% in interest annually. https://www.ennessglobal.com/portfolio-finance/securities-ba...

They also mention that there may be qualitative factors that come into play:

    The key points a lender will look at are:
      - The value of your securities
      - What the security is made up of
      - The liquidity of the security
      - If the security is listed, which exchange it is listed on 
      - How concentrated the shares are
      - The industry or field the company trades in
      - The management team