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Capital gains are only taxed when they're realized. They don't pay taxes when the value of their portfolios go up, just when they cash out. So instead they borrow against those portfolios and pay zero taxes.
Estate taxes are supposed to close this loop.
edit: Pokemon Cards are my go to analogy for capital gains. You can't tax someone on how much their pokemon card collection is potentially worth on ebay. You can only tax the money they made from the sale.
But how do they pay off the loan? They eventually need some sort of cash of their own right? Do they literally borrow to pay off a loan and do that infinitely?
New loans pay off the old loans. The cycle repeats. Seriously, if you zoomed out and looked, the billionaires and some upper 9 figure millionaires are in debt against their assets which clears on death. But the debt itself is low interest, and the assets are appreciating faster. Its one reason they say “hit a million and never worry about money”, though I think that number is like 5mil now.
You never actually spend your money…
Buy, Borrow, Die!
As long as the market’s doing well, yes.
You borrow $100 at 3% against a $125 asset and then invest it in an asset that appreciates 10%. After a year, your debt is $103 against a $137.50 asset, and your asset you bought with the loan is worth $110.
You take a second loan of $88 against your new asset (80%). Your first asset is now worth $151 with a $106 loan against it. Your second asset is now worth $121 with a $91 loan against it. And you have an extra $88 to spend on top of it.
So after 2 years, you started with $125 in assets and now have $272 in assets with $194 in debt, for a net gain of $78, and have pulled out $88 in cash tax-free. Whereas if you’d just left the money in the market you’d have only gained $26, and would have to sell and pay taxes on it to actually access that money.
This is the essence of the “borrow, repeat, die” strategy. It gets more complex as you’re typically making minimum payments on loans and working with large sums of money, but this is the basic strategy. It works as long as your investment profile keeps generating interest, which is why the rich use hedge strategies and other tricks to keep the money flowing during recessions. But an unexpected downturn can have the bank suddenly margin call you when you’re underwater on your loan, and then you might be facing bankruptcy if you didn’t do it right.
Thanks for the explanation!
If only we could have a nice unexpected downturn that wouldn't affect "us" right about now lol
They can always hurt you more. The market turns right before you retire? Lol there goes your 401k. Meanwhile, their hedge funds have made enough shorting the market to keep them afloat until it bounces back.
Yeah, THEY cause the downturns. When I buy a stock nobody notices. When Warren Buffett buys a stock, he moves the market.
But how do they pay off the loan?
Often by selling the asset they bought with the loan - aka cashing out. They borrow to buy a property/business, make the loan payments with the rent/revenue, and then sell it for a profit without spending a dime of their own money. NOTE: They will pay taxes on the capital gains of the sale of that asset. But they won't have paid income tax on the money they used to purchase the asset in the first place.
They eventually need some sort of cash of their own right?
They'll open a line of credit against their portfolio... which is a loan where the minimum payment is just the interest. They can use that like cash for their daily expenses and they can pay it off whenever and it will be there when they need it like a credit card.
Do they literally borrow to pay off a loan and do that infinitely?
Yes. It's called Return on Investment (ROI). You just need to borrow at a lower interest rate than the expected return plus expenses.
Billionares don't own things directly. They own stakes in corporations/trusts/etc that own things. They often have a salary that they pay income tax on, but that salary is only a fraction of their true income.
I think most billionaires are not paying either of those taxes in any significant amounts.
Most follow the buy borrow die method. Then their children just have to pay estate tax.
Advanced tax cheats like Bill Gates take it one step further by creating their own charities. You give all your money to the "charity" and give your kids full control of the "charity". This way you can avoid paying estate tax, and you only need to give away a tiny percentage of your wealth to actual charities and PR firms to save face.
Neither. If you don’t know how to not pay taxes, you aren’t going to be a billionaire.
It depends on how they paid themselves.
Most techfuckwits only get pain $1 a year as salary and the rest is made up with stock options or executive allowances. When they do cash out stock it will be taxes at a mixed rate because some will be sold as personal shares, others will be sold as part of a family trust and distributed in a way to minimise tax obligations.
They even get beyond that and almost never sell. Instead they open a loan against it.
Billionaires dont get taxed and thats why everything is shit alongside capitalism.
No
Why would we tax billionaires tho?!!? Do you want the measly trickle we get to stop?
The corporate minimum tax was a great idea.
Many actually don’t, they don’t convert (much) the capital to money, so they avoid capital gain-tax (which tends to have exception for business owner and long term holder), often they use company asset (like an average worker gets a phone, a laptop and sometimes a car, but they get a boat, a jet, and a nice house on the company budget), borrow money against stock, and actually don’t need that much of their actual money (remember that a billion is huge we don’t talk about getting a nice house, and a private jet, but multiple airliner, and a brand-new top notch hospital in the centre of an expensive city, including all worker wage for a while).
This is why so many people support a net worth tax like if you pay less than 2% of your net worth in regular tax, then you get an extra tax to reach these 2%
It should also be binding that if you declare that your assets are worth a certain value, the government has the option to buy the asset at that value, to avoid people under representing their net worth for unrealized gains.
they avoid having to pay taxes by getting paid in ways that dont qualify as income and by taking out continuously bigger loans each paid off by the next, along with other such loopholes that I dont know off the top of my head
They just borrow money with their portfolio as collateral, the more their portfolio value increases the more they can borrow without having to cash anything out that woild result in capital gains.
No.
Depends on how they store their money and what the income source is. The top 1% pays on average 40% of total federal income tax collected, in the US. Bottom 50% pays about 3% and the middle gets fucked up the ass for the other 57%. No idea how it works anywhere else.
The top 1% in the US is about 3.4 million people, but only about a thousand of them are billionaires. I don’t think you can generalize from the rest of the group.
