[AaronM]

If someone takes a loan out against an unrealized gain, that should immediately trigger a tax event.

The real solution though is for the legislative branch to not be beholden to those same people and be able to quickly and effectively close tax loopholes as they are discovered.

[cluckindan]

That would instantly wipe out most leverage from the stock market, and from a casual bystander perspective, it would be a great thing.

[pembrook]

It wouldn't do that. But even if it did do that, this would not be a good thing.

The majority of leverage (debt) in the stock market is not people making wild bets, its just basic functions from institutions.

But even if we narrow the definition to the boogeyman image you have in your head about "leverage," if you remove it you've just made the market radically less responsive to information and arbitraging prices nearly impossible, and ultimately the economy less efficient in broad strokes.

You'll say "fine, who cares cause it'll stop [insert historical bubble example], and also I saw a reddit comment that said all economists are dumb!"

But most people have no idea how big a role leverage (aka debt) plays in just the basic functioning of the capital markets.

Putting a brake on the market might also sound good to you in theory. But the stock market is how the most important capital flows through the private economy, slowing this down is defacto slowing down the economy. Most people don't understand what slower economic growth means for your quality of life over the long term. Just 1-2% slower growth than the average, and the US's entire system collapses in 15 years (France is currently dealing with this reality in slow motion, their debt is now rated worse than Greek debt).

An easier example to understand: a pie that isn't growing is a zero sum pie. Ambition in a zero-sum world requires violence.

[Terr_]

> If someone takes a loan out against an unrealized gain, that should immediately trigger a tax event.

How does that work when a house is used as collateral on a loan? Or artwork?

The loans are just a symptom, the problem is in the Estate Tax, and those loans are being used as a tool to wait out the clock and then dodge dynastic taxes entirely.

Remove the final loophole, and they'll stop playing weird games to get there all on their own. Plus it'll be way less-disruptive to everyone involves in regular loans for regular reasons.

[charcircuit]

There is not a loophole. When you die your loans get paid off first. The money to pay off these loans would be taxed. It could delay paying taxes until you die, but you can't escape it.

[Terr_]

> There is not a loophole. When you die your loans get paid off first. The money to pay off these loans would be taxed.

You're missing the loophole, it's the the "step-up basis" rule, which dramatically affects the amount of tax on that liquidate-to-repay event.

1. Repaying 1 day before the owner dies: Liquidate $X, of stock, which 90% of it are capital-gains, heavily taxed.

2. Repaying 1 day after the owner dies: Liquidate $X of stock, which is now considered ZERO gains, almost no tax.

This massive discontinuity also applies when it comes to the transfer of stock to inheritors, and any taxes they might pay for liquidating it. A day before, they get a stock that "has grown X% in Y years." A day later, they get a stock that "has grown 0% in 0 days."

> It could delay paying taxes until you die, but you can't escape it.

But they did escape the taxes, or at least the "gains" portion of them! For decades, the unrealized gains in growing assets were "eventually" going to happen someday... Until, poof, all gains have been forgotten.

[direwolf20]

The taxable value is exactly how much you borrowed against it!

[Terr_]

> The taxable value is exactly how much you borrowed against it!

I'm not sure what you mean by that term, since we're not talking about property taxes. With respect to capital-gains tax, the amount you liquidate is not the same as the gains being taxed.

> is exactly how much you borrowed

You're mistaken, the tax depends on the history of the item being liquidated. Suppose you need to repay a loan, and you have two options:

1. Sell 1 share of Acme stock for $20, that you originally bought for $20. Your $0 gain leads to $0 tax. Net cash: $20.

2. Sell 1 share of Acme stock for $20, that you originally bought for $5. Your $15 gain leads to $3 tax. Net cash: $17.

It's obvious you'd prefer the first one, right? Even though they're stocks from the same company being sold on the same day for the same market-price to service the same debt.

[direwolf20]

When you borrow money against an illiquid asset, the value of that asset is at least the amount you borrowed because otherwise the lender wouldn't have approved it. So just use that amount.

[Terr_]

> the value of that asset is at least the amount you borrowed

That assumption just isn't true: Loans are made based on risk and the expected ability to repay. Collateral is an optional and sometimes partial of reducing the lenders' risk, it bears no firm relationship to the amount being sought.

To illustrate, imagine a Debtor borrows $5,000 and offers up one of their child's crayon drawings as collateral. For private reasons we cannot see, the Lender accepts this deal. Do you truly believe the crayon-drawing has been proven to be "worth at least $5,000"? Would you joyfully jump at the chance to buy that crayon-drawing for a mere $1,250, confident that you could resell it for an easy $3,750 profit?

Probably not, and that's assuming everyone is acting ethically, we haven't even started to talk about how the Debtor and Lender could collude to game the system.

> So just use that amount.

At this point, you're probably thinking: "Very funny Terr_, but we both know the crayon-drawing obviously wasn't covering the full $5,000 loan here."

Yeah, but how did you reach that conclusion, what mathematical steps did you use?

I'm pretty sure you applied an independent judgement of what a likely crayon-drawing "should" fetch in some hypothetical future. That's quite reasonable, but the fact that you had to do it shows that the loan-basics are not sufficient to solve the problem.

[direwolf20]

That just doesn't happen. Either the lendor is happy with an uncollateralized loan, a significantly but partially collateralised loan (such as 50%) or a fully collateralised loan. And in each of those cases the lender knows exactly how much he thinks the collateral is worth. If the collateral doesn't cover the loan, there is a written agreement between both parties stating so. The borrower would be wise to use that as evidence, since it reduces his taxable gains. Otherwise it's assumed the collateral covers the loan. No need to do anything special.

[njarboe]

Agreed. This would get rid of borrow against gains to spend tax free. But also just get rid of the income tax, it is the worst way to tax, and do a land value tax.