These asset backed loans are just regular loans with lower interest rates. So instead of getting $50M @ 11% they can get it at 4%. That's the extent of the "hack".
They then keep the ball rolling by refinancing at each expiry and just paying the interest (and hoping their assets maintain or increase in value)
Eventually those loans will need to be repaid and the money will need to come from realizing capital gains.
So if anything its a tax deferral scheme with a low interest rate and elevated liquidation risk. Which all raises the issue of being taxed twice on the same money. Taxes once when you take the loan against it, and taxed again when you realize the profit to pay the loan.
Instead of two certainties in life being death and taxes, it's now death or taxes.
I have assets that have a single cost basis of $1
they are now worth $100.
I take a loan secured against 10% of them. I have now taken a tax event against 10% of them.
I now pay taxes on a capital gain of $90 on 10% of them.
I now have an asset split into 2 parts. one with a cost basis of $1 (90% of my assets) and one with a cost basis of $100 (as I paid taxes on a capital gain to $100).
One can perhaps argue that when levaraging unrealized assets for loans, one always uses the lowest cost basis assets for determining taxable event, or perhaps first in first out of taxable events (and therefore paying tax, is an out then an in).
Uh, yes. But they can be repaid with refinanced loans based on the same assets... So no guarantee that the gains will be realized. And in the possibly long interim between loan issuance and maturity, the owner accesses liquidity via the asset and pays nothing in taxes.
Which all raises the issue of being taxed twice on the same money. Taxes once when you take the loan against it, and taxed again when you realize the profit to pay the loan.
To clarify, I advocate that the loan issuance be a taxable event, where the cost basis of the shares are adjusted to the current price of the asset. So there would be no double taxation.
The interest on those loans is taxed as income which feeds back into the model.
Trivially fixed by simply letting you deduct the taxes paid when you took out the loan against the taxes owed when you actually sell.
While we're at it lets ban stock buybacks since all those are is a tax deferral scheme with utterly no other social purpose. Dividends are the correct way to distribute cash to shareholders. Full stop.
And get rid of stepped up cost basis on death - limit it to the IRS gift limit which is already ridiculously generous. Just to make it politically palatable so there are less sob stories about some "family" farm or company being force-liquidated to pay taxes.
So while it might be a feel good law, all it's doing is mixing around which cohort is paying up that year.
I agree that the step-up basis is pretty broken though.
I don't think any bank though is giving non-recourse loans for risky or depreciating assets (investors do that). It's usually for things that the bank is confident will be a good investment anyway if the loan goes sour - you default on the loan? Fine. But we keep the land.
Often they act as middleman, finding someone else that wants exposure to the startup when interest is oversubscribed.
Your paycheck is denominated in cash money. It can’t go to zero or be non-liquid for years like an investable asset. That’s a rather important distinction.
You can’t just go out and start selling stock to the public without a huge amount of legal paperwork.
If you're bootstrapped, borrow a bunch of money to pay tax because your company got to $10M val. But then the market shifts and it goes back down to $0 in later years, do you get the money back?
Even if you do, it sounds weird taxing someone for the right to create something, especially when they're still in the middle of creating it.
This is better for many founders that otherwise wouldn't cash out at all. VCs will be forced to cover your unrealized capital gains taxes.
> Moving from current realization-based to accrual-based taxation would reduce founder ownership at exit by 25% on average but would also increase the fraction receiving positive payoffs from 16% to 47% when tax credits are refunded.
Founders would use VC money to pay the tax and get a refund if the startup fails, since the capital gains were never realized. Therefore "pre-paying" capital gains would be a good thing for most founders since otherwise a liquidity event wouldn't happen for 84% of them.
This only happens with a tax on unrealized capital gains, though, not a normal wealth tax.
Another corollary is that "zombie startups" would be heavily discouraged, since "failing fast" could result in a payout.
That said a higher percentage of positive outcomes does not mean much when the majority of significant wealth is in that small percentage of high value firms founded.
Well no, because VCs might not give you money to buy chunks of the business as they want the money to go into the business.
An unrealized capital gains tax forces VCs to give founders money during funding rounds to cover taxes, money that is refunded to the founder in the event of the business going under.
This means you no longer lose everything in an unsuccessful exit, because you get a refund on the capital gains that you didn't end up having.
It is interesting to me that the party that runs on fiscal responsibility is the one that runs the highest deficits despite having a lower amount of GDP growth.
The actual problem (overwhelmingly) is that they spend to much on housing.
If we can just build more housing to bring down prices, 80% of reactionary "just seize their assets in anyway" rhetoric will go away.
Of course, this also means the middle class needs to take a 20%+ hair cut on their net worth. Deeply unpalatable, and doesn't fit the "1% will pay for everything" zeitgeist.
20% federal
3.8% net investment income tax
13.3% California
I'm generally a "liberal" and support fair taxation and goverment spending, but the current level, based on the worldwide tax rates I've found, doesn't have much room to grow, especially when it does seem like goverment services are actually supbpar for many, and these taxes don't support some sort of universal health care/cheap university like they do in many European countries. I truly believe that goverment can and should be a force for good in people's lives, but I don't think that means we should give it a blank check. It does feel delulu that so many democrats seems to blindly support raising taxes on the "rich". I do think a wealth tax is very much the wrong approach.
It's pretty frustrating to when folks talk about taxing the rich, since it seems like the policies that get passed often just add even more burden onto the "working" rich vs the capital based rich. Even the long terms capital gains rate is close to 30+% in high tax states + top bracket, but there is way more room for deductions.
Getting taxed on any increases in value early would feel very unfair. I have already put in so much value, for nothing in liquid/credible valuation yet, that things would have to go very well to compare equitably with what could sensibly have been expected if I had accrued half-time earnings, continuously saving and investing that income in its entirety, for over three decades.
Further worries: If I don't want to accept any venture capital, and at least for the foreseeable future bootstrap, would I somehow be forced into needing to liquidate ownership based on some accrued wealth rule anyway?
Hopefully not.
But if capital raises are the trigger for accrued wealth taxes, even a small raise after bootstrapped success gets ugly. Imagine raising capital after achieving bootstrapped success, by selling 1%, only to have to pay taxes on 99% of the company's new valuation! That would create a severe disincentive to take any capital ever, after bootstrapped success.
My suggestion: Only tax valuation gains on the sold shares. The realized valuation gain on capital raising shares passes (indirectly) to owners. The realized gains on any owners shares sold to cover those taxes would also pass (directly) to owners, as usual.
That would bring corporate capital raises into exact tax parity with normal owner stock sales.
The only difference is practical: The cash from an indirect sale (capital raise), goes to the owners indirectly (into the company), and is taxed indirectly (pass through). The cash from a direct sale (same sale percentage, but by each owner independently), goes directly to the owners, and taxes are assigned directly.
Either way, taxes are now identical.
(A third case, where all owners sell the same percentage of stock, and agree to all inject the funds into the company, might be a circuitous way to operate, but again, taxes are identical. Taxes on realized gains become sale path and cash purpose neutral.)
I will say though, that the most important thing someone ever pointed out to me was 100% of $0 is $0. Even just 65% of $really big number is still > $0
Where is this data from?
Not sure how to apply it on the corporate side. There are also multi entity workarounds to consider.
Just an idea.
Your first $1M should be taxed differently than your next $10M and so forth.
Real estate is included in that wealth, of course. And it has a different tax treatment than "usual" stock market gains.