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The Reddit /accounts were talking about this earlier this week and I think most of them had a pretty reasonable take. 1. If one uses an asset as collateral for

by mox1 2y ago

The Reddit /accounts were talking about this earlier this week and I think most of them had a pretty reasonable take. 1. If one uses an asset as collateral for a loan (be it stock or whatever else), for tax purposes treat that asset as sold, then immediately repurchased at the same price. 2. From there all of the usual tax laws can apply. So in theory this should get at the core of the actual problem, while avoiding at lot of the messiness of taxing un-realized gains. It's not perfect, but I think it helps align incentives well. Whoever is lending the money probably wants to know the value of the collateral. Lender and borrower are now both incentivized to come up with the real value at the time of the loan.

awongh 2y ago
Maybe it’s just a marketing problem then and it should be called asset collateral tax rather than unrealized gain tax, which on the face of it sounds kind of stupid.
nightski 2y ago
So small business can't take out loans unless they can realize and be taxed on the full valuation of their company immediately? As much as I can appreciate the goal, this is absurd.
- kgwgk 2y ago
  Businesses =/= Businesses owners
  - nightski 2y ago
    For many small businesses, that is false. Sole proprietorships and pass through LLCs are extremely common.
    - kgwgk 2y ago
      And can those businesses currently take a loan to pay for the owner holidays or whatever?
      - nightski 2y ago
        I do not see in the article where it says the loan has to be used for personal expenses. In fact from what I can tell it just says unrealized gains will be taxed regardless of whether a loan is taken out or not. The loan example is just used as a justification.
        kgwgk 2y ago
        You're the one who was talking about loans! In response to "If one uses an asset as collateral for a loan" you wrote "So small business can't take out loans unless they can realize and be taxed on the full valuation of their company".
        nightski 2y ago
        I was responding to the parent who also made no distinction that the loan was solely for personal purposes.
        kgwgk 2y ago
        The comment was about using assets as collateral for loans. Your response was about something else - or maybe it was not about anything, I'm not sure. A company can also get asset-backed loans using as collateral something the company owns - or it can get a completely different kind of loan where there is no specific asset used as guarantee.
- Ekaros 2y ago
  Business can take loan if someone loans money to it. The owner of such business can't take loan against it and not treat it as capital gain.
- azulster 2y ago
  why is everyone talking about small businesses when every proposal that's been published targets $100million + asset portfolios
  - CamperBob2 2y ago
    Wealth may not trickle down, but taxes damned sure do.
  - sickofparadox 2y ago
    Because income tax started as only targeting people making $3,000 a year, which was the top ~40% of earners in 1913. Once the door to a new government power is unlocked, it never closes it only gets more open.
    - BobbyJo 2y ago
      > Once the door to a new government power is unlocked, it never closes it only gets more open. I don't think "slippery slope" is a reasonable defense here, especially with the situation you're using as an example. The top 40% of earners is a lot of people, and pretty close to the number of people that pay positive income taxes today (50% of earners pay 97% of taxes). The slope you're using as an example doesn't look very slippery, especially given that 100+ years of the US changing completely has happened in the meantime.
      - cjbgkagh 2y ago
        That’s playing all sorts of games with the numbers, from 1917 the $2K threshold (50k in 2024) was at 2% tax rate with the top rate being 15% at $2m pa of 1917 dollars so ~$50m pa today.
        BobbyJo 2y ago
        1) Effective taxes aren't much different today. A married couple with no kids will pay < 5% on 50k. FICA is what makes it higher, so not exactly apples to apples. 2) You're choosing 1917, pre changes, to paint an inaccurate picture. Top rate went from 15% to 67% that year, and 77% the year after. Almost double today's top rate. What happened was, we introduced a revenue system, and have changed it over time, often dramatically, as the country's needs have changed, both raising and lowering rates. We haven't gone down some crazy spiral of ever increasing tax rates. If anything, the tax situation for the rich has gotten better over time, not worse.
- danaris 2y ago
  Is a small business loan usually taken out with the entire company as collateral? Rather than just based on normal loan terms and risk? (That sounds unlikely to me, but I know little enough about the intricacies of business finance that it could be true...)
  - tristor 2y ago
    Yes. It's very common to collateralize a loan with the total assets of the company, and often with personal guarantee on top of this for small LLCs without significant assets or credit history.
- bjornsing 2y ago
  This is not about businesses taking out businesses loans. It’s about the owners of businesses using their shares as collateral for loans. Most small business owners probably can’t even do this, because banks won’t accept their shares as collateral. So in a sense you could say this would even the playing field between big and small business.
  - deleted 2y ago
    [deleted]
  - deleted 2y ago
    [deleted]
- Gormo 2y ago
  What is the goal here, actually?
Spartan-S63 2y ago
Yeah, I agree with this take. I think making an issue of unrealized gains isn't the real story here. Using unrealized gains/assets as collateral is the way the ultra-wealthy avoid large swaths of income tax. I see two reasonable paths forward for taxing using assets as collateral: 1. Treat it as a sale and repurchase (as you described) and transform capital gains into a progressive system 2. Treat the sale as earning income for purposes of using the traditional income tax brackets. Either way, you don't get into a weird speculative tax gray area. Rather it's when the ultra wealthy want cash-on-hand that they incur some kind of income tax penalty. Maybe even put in a reasonable exemption ($25-100k/year) that doesn't trigger tax so that middle class households aren't hamstrung by this.
- cjbgkagh 2y ago
  One of the reasons I think politics is ok with income tax being where it is, is that the wealthy can currently avoid most of it. The wealthy can bring their money to bear to influence politics again to both broaden the scope so that the tax is more universally disliked and to create another carve out for themselves. Or at the very least situate themselves to benefit from government largess so that new taxes funding new spending is a net benefit for them. My main concern is that it puts the government in a position to greatly benefit from inflation, even more so than it does now, and inflation will be the hidden tax that hurts the poor.
- opo 2y ago
  >...Using unrealized gains/assets as collateral is the way the ultra-wealthy avoid large swaths of income tax. There are many web sites that claim this, but are there any actual reliable stats on how many lifetime loans are being given out? It is common to make short terms based on using stocks, etc as collateral. But how common is it to have a lender be ok with either deferring interest for decades until the person dies or continually giving new loans out to cover the interest (on paper at least)? Doing a quick search, I have not found one stat on how many lifetime loans like this are actually being done. There is a treasury department page claiming that about 160 billion dollars in unrealized gains are not being taxed, but that isn't talking about stock being used as collateral, that is talking about simply the value of assets increasing - that is entirely different. (If unrealized nominal gains should be taxed, should decreases in the value of assets lead to a tax refund?) According to this: https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185303024.html https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185... Bezos has sold around $13.4 billion in stock in 2024. If he could easily avoid millions (maybe billions) of dollars of capital gains tax by this one simple technique, why wouldn't he have?
rich_sasha 2y ago
Interesting. How does this interact with something trivial like remortgaging a house? Say I bought a house for 100k, cash. Now it's worth 200k. I want to take another 50k mortgage on it. Do I realize cap gains on 25% of my house, i.e. an increase of value on 25k to 50k, and then I'm liable for cap gains on 25k? At 20% say, that's 5k tax. Unpleasant for sure, but doesn't seem out of proportion.
- voisin 2y ago
  I believe it is only on unrealized gains over $100m.
snapplebobapple 2y ago
That will cause quite a painful but interesting deleveraging, i like it.

by mox1 2y ago

awongh 2y ago

Maybe it’s just a marketing problem then and it should be called asset collateral tax rather than unrealized gain tax, which on the face of it sounds kind of stupid.

nightski 2y ago

So small business can't take out loans unless they can realize and be taxed on the full valuation of their company immediately? As much as I can appreciate the goal, this is absurd.

kgwgk 2y ago
Businesses =/= Businesses owners
- nightski 2y ago
  For many small businesses, that is false. Sole proprietorships and pass through LLCs are extremely common.
  - kgwgk 2y ago
    And can those businesses currently take a loan to pay for the owner holidays or whatever?
    - nightski 2y ago
      I do not see in the article where it says the loan has to be used for personal expenses. In fact from what I can tell it just says unrealized gains will be taxed regardless of whether a loan is taken out or not. The loan example is just used as a justification.
      - kgwgk 2y ago
        You're the one who was talking about loans! In response to "If one uses an asset as collateral for a loan" you wrote "So small business can't take out loans unless they can realize and be taxed on the full valuation of their company".
        nightski 2y ago
        I was responding to the parent who also made no distinction that the loan was solely for personal purposes.
        kgwgk 2y ago
        The comment was about using assets as collateral for loans. Your response was about something else - or maybe it was not about anything, I'm not sure. A company can also get asset-backed loans using as collateral something the company owns - or it can get a completely different kind of loan where there is no specific asset used as guarantee.
Ekaros 2y ago
Business can take loan if someone loans money to it. The owner of such business can't take loan against it and not treat it as capital gain.
azulster 2y ago
why is everyone talking about small businesses when every proposal that's been published targets $100million + asset portfolios
- CamperBob2 2y ago
  Wealth may not trickle down, but taxes damned sure do.
- sickofparadox 2y ago
  Because income tax started as only targeting people making $3,000 a year, which was the top ~40% of earners in 1913. Once the door to a new government power is unlocked, it never closes it only gets more open.
  - BobbyJo 2y ago
    > Once the door to a new government power is unlocked, it never closes it only gets more open. I don't think "slippery slope" is a reasonable defense here, especially with the situation you're using as an example. The top 40% of earners is a lot of people, and pretty close to the number of people that pay positive income taxes today (50% of earners pay 97% of taxes). The slope you're using as an example doesn't look very slippery, especially given that 100+ years of the US changing completely has happened in the meantime.
    - cjbgkagh 2y ago
      That’s playing all sorts of games with the numbers, from 1917 the $2K threshold (50k in 2024) was at 2% tax rate with the top rate being 15% at $2m pa of 1917 dollars so ~$50m pa today.
      - BobbyJo 2y ago
        1) Effective taxes aren't much different today. A married couple with no kids will pay < 5% on 50k. FICA is what makes it higher, so not exactly apples to apples. 2) You're choosing 1917, pre changes, to paint an inaccurate picture. Top rate went from 15% to 67% that year, and 77% the year after. Almost double today's top rate. What happened was, we introduced a revenue system, and have changed it over time, often dramatically, as the country's needs have changed, both raising and lowering rates. We haven't gone down some crazy spiral of ever increasing tax rates. If anything, the tax situation for the rich has gotten better over time, not worse.
danaris 2y ago
Is a small business loan usually taken out with the entire company as collateral? Rather than just based on normal loan terms and risk? (That sounds unlikely to me, but I know little enough about the intricacies of business finance that it could be true...)
- tristor 2y ago
  Yes. It's very common to collateralize a loan with the total assets of the company, and often with personal guarantee on top of this for small LLCs without significant assets or credit history.
bjornsing 2y ago
This is not about businesses taking out businesses loans. It’s about the owners of businesses using their shares as collateral for loans. Most small business owners probably can’t even do this, because banks won’t accept their shares as collateral. So in a sense you could say this would even the playing field between big and small business.
- deleted 2y ago
  [deleted]
- deleted 2y ago
  [deleted]
Gormo 2y ago
What is the goal here, actually?

Spartan-S63 2y ago

Yeah, I agree with this take. I think making an issue of unrealized gains isn't the real story here. Using unrealized gains/assets as collateral is the way the ultra-wealthy avoid large swaths of income tax. I see two reasonable paths forward for taxing using assets as collateral: 1. Treat it as a sale and repurchase (as you described) and transform capital gains into a progressive system 2. Treat the sale as earning income for purposes of using the traditional income tax brackets. Either way, you don't get into a weird speculative tax gray area. Rather it's when the ultra wealthy want cash-on-hand that they incur some kind of income tax penalty. Maybe even put in a reasonable exemption ($25-100k/year) that doesn't trigger tax so that middle class households aren't hamstrung by this.

cjbgkagh 2y ago
One of the reasons I think politics is ok with income tax being where it is, is that the wealthy can currently avoid most of it. The wealthy can bring their money to bear to influence politics again to both broaden the scope so that the tax is more universally disliked and to create another carve out for themselves. Or at the very least situate themselves to benefit from government largess so that new taxes funding new spending is a net benefit for them. My main concern is that it puts the government in a position to greatly benefit from inflation, even more so than it does now, and inflation will be the hidden tax that hurts the poor.
opo 2y ago
>...Using unrealized gains/assets as collateral is the way the ultra-wealthy avoid large swaths of income tax. There are many web sites that claim this, but are there any actual reliable stats on how many lifetime loans are being given out? It is common to make short terms based on using stocks, etc as collateral. But how common is it to have a lender be ok with either deferring interest for decades until the person dies or continually giving new loans out to cover the interest (on paper at least)? Doing a quick search, I have not found one stat on how many lifetime loans like this are actually being done. There is a treasury department page claiming that about 160 billion dollars in unrealized gains are not being taxed, but that isn't talking about stock being used as collateral, that is talking about simply the value of assets increasing - that is entirely different. (If unrealized nominal gains should be taxed, should decreases in the value of assets lead to a tax refund?) According to this: https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185303024.html https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185... Bezos has sold around $13.4 billion in stock in 2024. If he could easily avoid millions (maybe billions) of dollars of capital gains tax by this one simple technique, why wouldn't he have?

rich_sasha 2y ago

Interesting. How does this interact with something trivial like remortgaging a house? Say I bought a house for 100k, cash. Now it's worth 200k. I want to take another 50k mortgage on it. Do I realize cap gains on 25% of my house, i.e. an increase of value on 25k to 50k, and then I'm liable for cap gains on 25k? At 20% say, that's 5k tax. Unpleasant for sure, but doesn't seem out of proportion.

voisin 2y ago
I believe it is only on unrealized gains over $100m.

snapplebobapple 2y ago

That will cause quite a painful but interesting deleveraging, i like it.