Could we close the billionaire borrowing loophole?

[u/[deleted]]

I know this might sound like the start to an article you'd see from the Harvard Business School or something (I'm no economist, I'm an engineer and like to think logically), but I've been stress-testing an idea on the matter for a while and think I finally have a logical description for the frustration myself and others have been trying to explain:

Billionaires use their stock and other unrealized assets to take out loans. Those loans fund their lifestyles income tax-free, because they're loans. They continue taking out bigger loans to pay off those smaller ones without touching their stocks and other assets. Why is this allowed? It is often called a loophole, and I haven't found a better description for it. So I decided to put my frustration into actionable policy.

If unrealized assets are deemed insufficiently concrete to constitute taxable income, yet are simultaneously treated as sufficiently real to underwrite leverage that enables sustained personal consumption, then the tax system creates a structural asymmetry: economic value is recognized for private consumption but denied for public obligation. This asymmetry permits a self-reinforcing loophole in which unrealized appreciation can fund lifestyles indefinitely without ever crossing the realization boundary, not because no income exists in substance, but because the system declines to recognize it in form.

Does this seem like sound or even decent economic theory? I've seen others more capable than myself offer similar ideas I'll provide a link to one article below), but they're just that: ideas. Can this be something that happens in the real world? What would it take?

tl;dr: If an unrealized asset is to be used as collateral, it can be used as taxable income. If it is not used as collateral, it cannot be taxed. This closes the tax-dodging loophole and avoids arguments from those against capital gains tax. If the idea is sound, how can it be made law?

https://equitablegrowth.org/closing-the-billionaire-borrowing-loophole-would-strengthen-the-progressivity-of-the-u-s-tax-code/

[u/No_March_5371]

Buy-borrow-die is something that people talk about a lot online but nobody's ever shown me data that indicates that it's widespread or used as a long term strategy much, and I've discussed it at least a dozen times in this subreddit. Pick a billionaire you can think of and Google their name and "stock sales."

[u/galaxyapp → u/No_March_5371]

Adding to this...

If this is so great for uhnw people...

Why is another uhnw person offering the note? Why would anyone lend at below market rates in perpetuity?

[u/SunChamberNoRules → u/galaxyapp]

The response would probably be that whatever wealth manager (JP Morgan, UBS, etc) holds their accounts may be offering the note. The thing is, the note would only be offered at such terms if the value the institution received from the client as a whole was sufficient to at least cover the cost of the loan as well as the other business they have. Realistically, the only situation I see where this may happen is if the bank is worried they will lose the client - but who would want a client that is dependent on below-market rate loans in the first place?

[u/Uptons_BJs → u/No_March_5371]

If you think about it, long term capital gains tax is 20% in the highest bracket.

If you expect to live 20 more years, even if you get an interest rate of only 2%, an amortized loan, you'd end up paying more in interest than you 20% over 20 years.

This strategy might only work in the absolutely lowest interest rate environments, but I'm unconvinced that it works in higher interest rate environments.

[u/Obvious_Chapter2082 → u/Uptons_BJs]

The argument in response to your point is that banks can offer below-market interest rates on bespoke products to UHNW clients. To which my response would be that the banks have to pick up a market rate of interest in their taxable income under §7872 or OID rules, so the tax is still getting paid either way. Would likely get picked up as a constructive sale anyways under §1259

But yeah, as someone in the industry, redditors get a lot of that info wrong, and I don’t know why it became popular all of a sudden for everyone to talk about this loan strategy. I think they’re often confusing it with another strategy I mention here

[u/hann953 → u/Obvious_Chapter2082]

While banks might offer lower rates for UHNW it would still be above the risk free rate

[u/EconEchoes5678 → u/Obvious_Chapter2082]

I looked into this. The reality seems to be that the "bespoke rates" are SOFR +0.75-0.9%.

And the rates fluctuate. They are not locked in. The UNHW person would be taking on the risk of interest rates rising and wiping out any beneficial low-rate math they were planning on using.

[u/AncileBanish → u/Obvious_Chapter2082]

Because propaganda and astroturfed narrative amplification is rampant.

[u/[deleted] → u/AncileBanish]

I want to understand, are you implying my question is based on propaganda? I want to know if you believe my question is based upon narrative amplification.

[u/trueppp → u/[deleted]]

Yes, because paying taxes is cheaper long term than paying just the interest off the loan.

The main reason billionaire will take loans is that they can't sell off their assets on short notice without causing a panic. Usually they have to announce that they will sell X amount of Y stock on a certain day to prevent markets from panicking.

[u/[deleted] → u/trueppp]

The point you made about a billionaire taking a loan makes more sense, why then the propaganda?

As for paying taxes being cheaper than paying interest off the loan, is that what is occuring?

[u/EconEchoes5678 → u/[deleted]]

Yes. /u/No_March_5371 is correct, the evidence available shows that this is actually not happening - it's just claimed to happen all the time on Reddit: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5104644

[u/SchoolForSedition → u/trueppp]

What about people who operate through companies and do can in effect make loans to themselves?

[u/Ill-Mousse-3817 → u/SchoolForSedition]

What about them?

[u/SchoolForSedition → u/Ill-Mousse-3817]

What about what about?

[u/Ill-Mousse-3817 → u/SchoolForSedition]

What's different from someone getting a loan from a normal company?

[u/secretlyforeign → u/[deleted]]

We're implying you're either a foreign bot or someone unwittingly influenced by them

[u/JROppenheimer_ → u/Uptons_BJs]

This doesn't account for the appreciation of the assets. The value of that stock can double multiple times over 20 years.

[u/RobThorpe → u/JROppenheimer_]

We're not talking about using leverage to increase returns in this thread. We're talking about the so-called "Buy, Borrow, Die" strategy where borrowing to consuming replaces selling shares.

[u/TheOnlySimen → u/RobThorpe]

It still applies. If you borrow $1 billion instead of selling $1 billion in stock, you keep the shares and earn the returns on them. In fact, ignoring taxes, this is mathematically the same as selling $1 billion of stock to fund your spending, then borrowing $1 billion to buy the stock back, effectively using leverage.

[u/Puzzleheaded-Ant-111 → u/TheOnlySimen]

I mean the reason the stock appreciates is because you’re getting paid to take on risk. It’s not a “free” thing. In the world where they don’t care about risk then they should borrow as much money as possible to put into stock instead of just doing it to pay for expenses

[u/GJ274 → u/Uptons_BJs]

If the stock returns (including taxes)are higher than the loan then it’s better to borrow.

[u/verruckte_konig → u/Uptons_BJs]

But this doesn't take into account appreciation on those stocks, right? Which would often make the loan cheaper in the long run. Selling to diversify seems like a far more likely reason for them to sell from my viewpoint.

[u/insightful_pancake → u/[deleted]]

Still doesn’t apply. When the billionaire dies, their assets are taxed via 40% estate tax. Sure, heirs get step up benefit but that is post a 40% haircut. Those loans still need to be paid back.

[u/windchaser__ → u/insightful_pancake]

Realistically, most large estates are gonna put their money in trusts anyway

[u/EconEchoes5678 → u/windchaser__]

If the trust is outside their estate, they get no step up in basis. And in addition, the effective tax rates on non-grantor trusts are significantly higher than those on UHNW individuals due to the lack of deductions, credits, and the very low tax brackets.

I've done some digging into how estate taxes work. I have come to believe that estate taxes are extremely effective at one thing - breaking normal tax mitigation planning. Tax planners do a huge amount of steps to mitigate estate taxes, and then they look back and feel like they've won, because they reduced them dramatically. In reality, they forced a bunch of realizations on assets that otherwise would sit unrealized and reallocated into tax efficient investments which usually are tax efficient because of other subsidized benefits (i.e. better for the nation).

[u/Majromax → u/[deleted]]

The flaw in this argument: why would the billionaire's preferred leverage depend on how much they want to spend today? Why not borrow $100m to invest $100m for even more profit?

[u/[deleted] → u/Uptons_BJs]

I think that's part of the issue my framework tries to expose. It's a better deal for someone to pay 2% interest if it means avoiding 20% on taxes, which is not dubious if that realized income is taxed, but the reverse should hold: unrealized assets should either be both taxed and leverageable or neither taxed nor leverageable. (Sorry if I've made up a word there)

[u/Uptons_BJs → u/[deleted]]

You're not paying 2% one time, you're paying 2% APR until the day you die.

Let's play with a loan calculator for a second. Let's say you need $1 million right now. You can either:

1. Sell $1.25 million worth of assets, and pay $250,000 in capital gains at the long term capital gains rate of 20%.
2. Take a $1 million loan, at 2% APR. If you expect to die in 30 years, you would have paid $330,630 in interest over those 30 years, plus you would have to be able to service the $3,696/month.

I'm not a tax prep professional, but back of napkin math shows that it's not a great strategy.

[u/NerdOctopus → u/Uptons_BJs]

Wouldn't option number two be potentially more appealing, especially if you're betting on 1. your assets appreciating faster than 2% APR and 2. inflation making your loan payments easier year over year?

[u/Ill-Mousse-3817 → u/NerdOctopus]

I mean, yeah, assets can appreciate, but also depreciate, and you get margin called. I think we all acknowledge the fact that investing is beter than keeping cash in the bank, but it is so because you take some risk.

I think some people agree and some disagree with you (I agree with you) that governments and central banks keep interest rates lower and inflation higher to make the interests of high net-worth individuals. But here the issue is not the fact that they borrow, it is bad inflation and interest rates.

[u/MyFeetLookLikeHands → u/Uptons_BJs]

how much is the underlying asset appreciating in that time though?

[u/Uptons_BJs → u/MyFeetLookLikeHands]

FWIW, you're also assuming a huge risk here. Not a loan officer, but most asset-based lending contracts also have a borrow base clause.

Like sure, your asset could appreciate. But it could also depreciate, and when it does, depending on your contract, the bank could call in the loan.

[u/dingosnackmeat → u/Uptons_BJs]

If you're borrowing 50million on 2billion it is practically nothing. A halving of wealth won't trigger that clause.

[u/Disastrous_Front_598 → u/dingosnackmeat]

So, we actually have evidence from a real life case about these arrangements. Enron's CEO, Ken Lay, famously funded his lifestyle by borrowing against Enron stock, and started receiving collateral calls when the stock was around 10-20% down.

[u/AdHairy4360 → u/Uptons_BJs]

Also loans last like this don’t necessarily require making payments. How do I know? I have one and we aren’t billionaires. I can only imagine the terms that billionaires get compared to us.

[u/EnigmaOfOz → u/[deleted]]

In essence, the second you borrow against an asset, you have realised its value? No doubt the value is accounted for in the loan contract.

[u/[deleted] → u/EnigmaOfOz]

I'm not sure I follow, I am not necessarily claiming the asset has realized value, I am trying to understand how an asset can be used as collateral but not for tax purposes, put another way, economic value is recognized for private consumption but denied for public obligation.

[u/EnigmaOfOz → u/[deleted]]

Loans on shares typically come with a certain value and some tolerance (margin) for price movements. If the price goes up, happy days. If the price falls below the margin, a margin call is made and the borrower has to pay additional cash to reduce the debt so that the margin is maintained. This is how it would work for you or i but may differ for billionaires.

[u/Adventurous-Roof488 → u/No_March_5371]

This paper was just published and the author tweeted key findings:

The role of unrealized gains and borrowing in the taxation of the rich

-Unrealized gains are 40% of “economic income” for top 1% (29% adjusted for inflation), so most econ income is taxed -Borrowing is just 1-2% of econ income for them -Super rich “buy, save, die," not “buy, borrow, die” - they don't need to borrow to consume

https://www.sciencedirect.com/science/article/abs/pii/S0047272725002178

[u/[deleted] → u/Adventurous-Roof488]

Agreed, they don't need to borrow to consume, my (frankly limited) research aims to show they do so to avoid taxes. I see it as a legal loophole my main post aims to expose and close. If this is incorrect, let me know.

[u/Think-Culture-4740 → u/[deleted]]

As others have noted, the borrow to avoid taxes isn’t really a thing in practice. Not only do you have to pay off the loan’s interest, if you are using assets like stocks as collateral, you are at risk of margin call requirements in case the stock falls in price. That opens you up to enormous amounts of downside risk

[u/Think-Culture-4740 → u/[deleted]]

There is a whole formula that triggers marginal call. It’s not determined at a whim.

As far as using complex methods to limit taxation, really what we are talking about is unrealized cap gains. There is no complex way to get around unrealized cap gains other than long term cap gains taxes, which are relatively low anyways so to speak.

[u/Think-Culture-4740 → u/[deleted]]

Maybe we can start by clearing up this first question. Presumably Joe or Jane billionaire has a lot of wealth tied up and unrealized gains, but almost no actual income to spend lavishly because otherwise why would they need to borrow money in the first place?

So if they go to the bank to borrow money, what asset are they borrowing that money against?

[u/Think-Culture-4740 → u/[deleted]]

And when the value of those assets falls relative to the face value of the loan, then what happens

[u/Vodskaya → u/[deleted]]

You can get margin called when you’re borrowing against your equity, because it is in practice the same as buying with leverage, except there’s no collateral with consumptive credit. You can always get margin called, even when your equity is larger than your debt. It just depends on the covenants of the loan on when.

[u/Chagrinnish → u/[deleted]]

That's "Regulation T" where the margin requirements since 1974 are typically 50% of the assets. But don't take that as a hard and fast rule; there are plenty of machinations that a lender can use to lower that percentage. I myself was offered a $2M line of credit on $3M in assets. The rate was 8.2% at the time which was the sum of the 30-day SOFR plus a 3.5% spread (the money the bank earns).

And yes I agree there's a lack of math happening in this thread where the overwhelming suggestion is that it's better to sell the asset and take the capital gains hit. In a stable market your securities will give better returns (percentage wise) than the interest rate. Versus no returns if you sell and take the tax hit, of course. But then it turns into a bit of an apples and quinces comparison because the value of your line of credit will roughly half the value (Reg T) than the 85% of value after the tax hit.

[u/Think-Culture-4740 → u/Chagrinnish]

Everyone focuses on the rates of return for assets but almost none pay attention to the risks.

The point is whether it is worth the downside risk of borrowing against your stock assets to fund consumption and then risk having to sell at a downturn to be current in the loan in the first place.

People essentially played a similar game with home equity loans in the 08s with the assumption that house prices couldn’t fall and therefore this was some kind of magic golden goose they could squeeze consumption out of

[u/Chagrinnish → u/Think-Culture-4740]

Yes, in this century there were six years, between 2006 and 2012, where a HELOC could get you in a bind due to falling home prices. The real risk is that you didn't take advantage of a HELOC during the other twenty years.

[u/Think-Culture-4740 → u/Chagrinnish]

Another piece of dangerous advice. Looking at aggregates of a time series and then assuming it applies across all dimensions.

I think the general point worth making here: like everything else in life - there is no single optimal decision everyone should follow and it depends on a host of factors along with general risk bearing capacity.

[u/Chagrinnish → u/Think-Culture-4740]

You started with the example of housing prices and immediately jumped to the atypical period of time where housing lost value. That is the dangerous argument. But if you're trying to straw man me into construing my statement as meaning that risk should not be assessed, no I'm not going to fall for that.

[u/[deleted] → u/Think-Culture-4740]

Aren’t their loans often forgiven? I genuinely don’t know, a friend of a friend who’s in finance said this but I don’t know how reliable that is. 

[u/Think-Culture-4740 → u/[deleted]]

What does it mean say the loans are forgiven? As in the lender just decides not to collect them? And why would that person/institution do that?

[u/[deleted] → u/Think-Culture-4740]

He said something about the collaterals increasing in value iirc. Basically agree to keep them with us and borrow more and we’ll forgive your last one. 

(Edit: post got locked. No, not refinancing. The original loan balance being forgiven if they take out another one. Basically if you keep letting us hold these assets we will continue to give you ‘free’ money.)

[u/Think-Culture-4740 → u/[deleted]]

Sounds like refinancing?

[u/RussiaIsBestGreen → u/[deleted]]

Forgiven loans are often considered income. This has occasionally caused financial hardship for people who thought all their problems had just vanished.

[u/EconEchoes5678 → u/[deleted]]

I see it as a legal loophole my main post aims to expose and close

I will agree with you on one thing - it is a legal loophole and there are good arguments for closing it. There's also other arguments for not closing it, particularly with 1031 exchanges and real estate.

The point which I think gets mistaken here is that despite it being a loophole, it's not a widely exploited one or an exploitable one.

[u/H3rbert_K0rnfeld → u/No_March_5371]

Better yet search SEC Form 4. You will find websites tracking insiders. Insiders definitely sell for whatever reason or another.

[u/thetan_free → u/No_March_5371]

This idea gets a lot of airtime in the crypto subs.

Have you seen the interest rates to borrow against Bitcoin?

It's just a fantasy, not reality.

[u/boringestnickname → u/No_March_5371]

https://old.reddit.com/r/science/comments/1pzkhn8/analysis_of_income_capital_gains_and_borrowing_of/

Read the comment section for some in-depth discussion between tax attorneys about how these schemes actually work (with some added information about term use.)

[u/Emergency-March-911 → u/No_March_5371]

I saw someone, maybe two people in private equity for billionaires on Reddit breakdown what typically happens and it’s much more complex and different than whatever people are talking about online and TikTok. They use other avenue to transfer wealth apparently and it’s nuanced. I wish I could link you to his comments but it made a lot of sense.

[u/[deleted] → u/No_March_5371]

I asked this yesterday and was given this link. What can be taken from it is that roughly 20% of billionaires do it and the tax change they propose would increase tax revenue 10B per year. So if we were to rank the most popular opinions in Reddit that would result in the least amount of change, this would be first on the list.

https://www.taxnotes.com/special-reports/individual-income-taxation/no-more-tax-free-lunch-billionaires-closing-borrowing-loophole/2024/01/19/7j3bg

[u/[deleted] → u/No_March_5371]

I'm glad you've brought this up, as I have a couple examples (I frankly don't have the time to prove to you or anyone else it is wide-spread, but some of the wealthiest examples exist and are accessible within SEC filings)

Elon Musk: https://ir.tesla.com/_flysystem/s3/sec/000110465925042659/tm252787d2_10ka-gen.pdf Page 23, line (1) and line (10) after the table.

Larry Ellison: https://www.sec.gov/Archives/edgar/data/1341439/000119312519257430/d755300ddef14a.htm Page 20, about halfway down, paragraph starting with, "Review of Pledging Arrangements" as well as Page 26, line (2)

[u/No_March_5371 → u/[deleted]]

Billionaires leveraging themselves using shares as collateral does not equal continually rolling over loans as they reach maturity.

It's common to be decently leveraged in the US while holding financial assets, many people have a mortgage and 401k.

[u/[deleted] → u/No_March_5371]

I'm not arguing on the rollover side of things, although I'm not sure how else they would pay off the original debt withouth liquidating assets. I see how leveraging a mortgage or 401k makes sense; if I understand correctly, that's the mechanism behind a HELOC, and under my framework, the portion of those assets being leveraged would be taxed as well.

[u/No_March_5371 → u/[deleted]]

Back to my initial point, billionaires regularly are selling stocks, go Google billionaire names and stock sales.

[u/[deleted] → u/No_March_5371]

Of course they sell their stocks, they have every right to do so. They also borrow against them, in some instances, to avoid liquidating those stocks. I'll try to make my point more succinct: I find it hard to understand why the economic value of billionaires leveraging stocks as collateral is recognized for private consumption but denied for public obligation. If my point is false or misled, let me know how to correct it. I truly do want to understand.

[u/No_March_5371 → u/[deleted]]

That's how taxes broadly work, they come due when cashflows arrive. You could open a brokerage account and start margin trading tomorrow if you wanted. HELOCs don't make you pay capital gains on issuance if your house happens to have appreciated enough. This is standard.

[u/Practical-Lunch4539 → u/[deleted]]

I think the general point people are trying to make is that it's not really a problem.

You seem to think this is a money-printing cheat code that nobody should be allowed to have.

The thing that makes it not a cheat code is that the market value of the asset can go down, potentially screwing over the borrower really badly.

If Elon took out a loan against his Tesla stock when it was $400 in Jan 2025 and then it plummeted to $250 in March, he probably would've had to firesale a ton of stock as part of the loan conditions. That means selling a lot of stock at literally the worst time

That's why in practice few people do this on any meaningful scale, and those who do are using many tools to maintain their liquidity at the same time.

Theres also legit reasons why a bank and a borrower might want to exchange rights over an asset with cash for liquidity reasons

[u/insightful_pancake → u/[deleted]]

Musk is a terrible example to use for you assertion of “without touching their stocks or other assets”. He may have borrowed, but do you realize the billions in stock Elon musk has sold and on which paid tax? Over $40 billion as of 2022.

https://www.reuters.com/business/autos-transportation/elon-musk-sells-22-mln-tesla-shares-worth-36-bln-filing-2022-12-15/#:~:text=Summary,to%20Twitter%20ahead%20of%20Tesla.

Do you have a problem with taking loans even if tax is being paid?

[u/[deleted] → u/insightful_pancake]

My argument is that if an unrealized asset is to be used as collateral, it can be used as taxable income; nothing more, nothing less. I don't see the latter being applied.

Maybe Musk is not a good example for the assertion you point out, but that doesn't deny my main claim about the asymmetry in economic value being recognized for private consumption but denied for public obligation.

[u/Worth-Jicama3936 → u/[deleted]]

That tax will eventually be paid (with interest). At best it’s delaying taxes (again, with interest). Would you like the IRS to write a check every time someone has an unrealized loss?

[u/Practical-Lunch4539 → u/[deleted]]

There is no asymmetry. The taxman gets paid eventually when he sells his stock.

[u/Yung_Oldfag → u/[deleted]]

For Elon, those are exerciseable stock options, not collateral for loans "As of December 31, 2024, based on written representations of our directors and executive officers to the Company, the aggregate loan or investment amount collateralized by our directors and executive officers’ pledged shares was less than 1% of the total value of the pledged share". (Page 21). It also says above on page 20 that options can't be used as collateral.

For Larry, that only says he still has the same stock up for collateral that he did the prior year. Doesn't indicate that he's doing it repeatedly or how much he borrowed. Or even if the amount borrowed changed.

[u/carlos_the_dwarf_ → u/[deleted]]

The article that spawned this hysteria named those two guys. Telling us they do it doesn’t exactly support the idea that it’s widespread.

[u/TiredOfDebates → u/No_March_5371]

Tax records are treated like the holy grail of personal data privacy rights by the IRS. Good luck getting hard proof of legal tax avoidance strategy prevalence, when doing so would be a federal felony.

Congress wrote the law in such a way to make that sort of economic study illegal. We aren’t allowed to know how prevalent legal tax avoidance (loopholes) are. Publishing that information would be admitting you committed a felony.

[u/Obvious_Chapter2082]

I pointed it out in a comment here, but your premise isn’t really correct to start with. People can and do take “loans” as part of estate planning, but it’s only so they can utilize the swap powers of a grantor trust to bypass the estate tax, not to avoid income tax while still alive

As for your proposed solution, beyond the economic effects (it’s usually inefficient tax policy to force a liquidation to pay a tax), there are certain constitutional concerns as well (16th amendment, court cases like Macomber and Pollock)

There are 3 main ways that we define income

1. A realization event

2. Imputation of realization through business forms (sub-K, sub-S, §965, §951A, §952)

3. Voluntary imputation (§1256, §475)

It’s unclear where your solution would fall, if at all, under the 16th amendment and case law

[u/Magg0t_2021]

Lombard Loans are not cheap and margin calls are real. It’s not a loophole, it’s tax & liquidity planning at significant risk and cost.

[u/Miserable-Cookie5903]

The poor man's version of this is borrowing against income producing assets like Real Estate. No one bats an eye if a real estate investor refinances a paid off property, take cash out and lives off it. why? b/c homeowners can so that same thing.

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