this post was submitted on 07 Oct 2024
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The thing that bothers me when people say "oh its unrealized gains, it's not real money" is that they use those unrealized gains as collateral for loans of real money. They effectively ARE that rich.
It's BS that you can borrow against it. If he did sell it the valuation would drop.
As far as I'm concerned, that's the point at which unrealized gains should be taxed: as soon as you're using it as leverage
So how do they pay the loans back if the liquidity isn't there?
With money they loan from a bank, using whatever they bought with the previous loan as collateral.
It's credit all the way down.
And that ends when they die, at which point the stocks get stepped up in basis so the taxes are almost completely avoided. Or they structure their debts in such a way that certain entities can be bankrupted without impacting the actual assets.
Things get wild when you're in the 0.1% and above.
I can't imagine how this isn't fraud
It's just playing by the rules as stated, and we have decided that limiting the liability of corporations is desired.
If you start a business, banks loan a lot to that business, and then the business goes under, you don't lose your house. That's the way it's supposed to work, and the intention is to help small business owners not lose their shirts if things go sideways.
But it also ends up benefiting wealthy people because they can use these legal entities to shelter funds. A common real estate strategy is to have a corporation own your properties, leverage them like crazy, then if the market drops and you're underwater, bankrupt the company. You'll lose the properties, sure, but you'll also lose the debt, so you can end up net-positive.
I think we absolutely need to reform how corporations work and remove liability as the value of the company increases. But in most cases, these wealthy people are just playing by the rules that have been agreed upon. IMO, the solution here is generally fewer rules to let things like fraud laws work, not to create more and more exceptions (because who has the resources to find loopholes? The uber-rich).
Banks don't take this into consideration when assessing collateral?
Lol, who downvotes a question?
There are completely different rules when you are that rich. Look at Trump, he bankrupted how many businesses and banks STILL lined up to loan him money. At the very top, your trading favors and power.
Take what into account? They basically look at current valuations and offer loans up to some fraction of that amount.
And that's generally the way the ultra-rich operate, they don't actually sell anything, they just borrow against their assets. They punt the can down the road until they die, at which point those unrealized gains get stepped up in basis for those who inherit it. If you have enough stock assets, you can service the debt with the capital gains you're forced to realize (i.e. dividends).
So the bank sees someone with $100B in assets asking for a $10M loan or whatever, and they're completely happy to offer that, because even if the stock gets cut in half, he can still pay the debt.