[magicalhippo]

> however is able to use it as collateral to borrow against (that way he doesn’t even have to pay capital gains)

I really don't understand how borrowing against shares isn't counted as realizing the stocks. I mean, apart from rich people lobbying against it and such.

If I buy some stocks for $100 and sit on them until they're worth $1000, if I sell them for $1000 or take a $1000 loan against them, I've realized the $900 gain and I should pay taxes on that either way.

[thunky]

> I should pay taxes on that either way

If the stock value drops below $1000 (or to $0), would you get your tax $ back?

[magicalhippo]

Why would you? Your choice to realize. If you're worried about that just sell them instead of taking a loan.

[thunky]

Because you paid taxes on something that's worthless, which is the argument against this kind of tax: the value is too dynamic and hard to determine.

If paid $1000 for the stock, then took a loan and paid interest on it, then paid taxes on the $900 gain, and now the stock is worth $0. Now all I get to take is a loss on the $100. Bad deal.

[magicalhippo]

In that case you took a gamble and you lost. That's how gambling works.

If you don't want to gamble then sell the stocks, that way you are not surprised by later changes.

[thunky]

Yeah, I lost $100. That's what I gambled. So why am I paying taxes on $1000 again?

[magicalhippo]

No, you also gambled that they'd keep or increase in value, potentially to get even more out of them in the future.

Again, if you didn't want to accept that risk you could have just sold the stocks instead of taking a loan.

This isn't much different from taking a loan against a house, and then due to external circumstances the house drops in value, say a landfill next door. You're not getting back the property tax you paid.