The richest people borrow against their stock (2021)
Wealthy Americans often fund their lifestyles by borrowing against appreciated stock rather than selling it, allowing them to access cash while avoiding capital gains taxes. Commenters compare this to margin loans and home equity lines available to ordinary investors, but note that ultra-low rates, bespoke lending terms, and the “buy, borrow, die” strategy with stepped-up basis on death make it far more powerful for billionaires. Much of the debate centers on whether loans collateralized by assets should trigger taxation, and whether reform should target these practices or the underlying estate and capital gains rules.
How borrowing against stock works and who can do it
- Many commenters note this isn’t unique to billionaires: brokers and banks offer margin loans, securities‑backed lines of credit (SBLOCs), and “Lombard” loans against stock and bond portfolios.
- Typical loan‑to‑value is ~50–70% depending on asset risk; concentrated or volatile positions get harsher limits.
- Some brokers restrict using margin proceeds to buy more securities; others allow cash withdrawal as a de facto personal loan.
Interest rates and products
- Retail margin/SBLOC rates vary widely: examples include ~SOFR + 2.4–4.4% at one broker, SOFR + 1.9–3.1% at another, vs 11–13% at a higher‑cost broker.
- Interactive Brokers is frequently cited as relatively cheap (roughly Fed funds + 0.5–1.5% depending on size).
- In other countries (e.g., India) such loans can be around 10%, consistent with higher local base rates.
Tax strategies: “Buy, Borrow, Die” & step‑up basis
- Core loophole discussed: very wealthy people can live off loans secured by appreciated stock, never selling, then die.
- On death, heirs get a stepped‑up cost basis (asset basis reset to market value), so decades of gains may escape capital gains tax entirely.
- Several argue this “step‑up in basis” is the main policy problem, not borrowing itself; proposed fixes include carryover basis (heirs inherit the original basis) and/or stronger estate taxation.
Should borrowing against unrealized gains trigger tax?
- One camp argues any economic use of unrealized gains (e.g., collateralized loans) should be treated as realization and taxed.
- Others say loans are liabilities, not income; net worth doesn’t rise when you borrow, so taxing the loan is conceptually wrong and extremely hard to implement without hitting normal borrowers (HELOCs, small‑business loans, etc.).
- Attempts to define “usage” of unrealized gains (covered calls, broker rehypothecation, showing account statements to lenders) quickly become messy and loophole‑prone.
Comparisons: homes, HELOCs, and other collateral
- Repeated analogy: borrowing against stock vs home equity loans or reverse mortgages.
- Some say homes are already indirectly taxed via property tax and (limited) capital gains rules; others note property tax is separate from federal capital gains and often based on undervalued assessments.
- The thread also touches on borrowing against art and other illiquid assets as collateral.
Risk, leverage, and practicality
- Leveraging a portfolio introduces market risk and margin‑call risk; rich borrowers are more diversified and resilient, small investors less so.
- Several simulations and back‑of‑envelope arguments suggest: at today’s interest levels, using SBLOCs to avoid realizing gains can be beneficial in many scenarios but catastrophic in a minority of bad markets.
- Some emphasize these sophisticated “buy‑borrow‑die” structures only make sense above very high net‑worth thresholds (hundreds of millions).
Wealth, fairness, and broader tax ideas
- Debate over whether ultra‑rich “pay their fair share,” with references to their large absolute tax payments vs low effective rates and extreme wealth concentration.
- Alternatives proposed or debated: wealth taxes on financial assets (analogous to property tax on homes), taxing spending instead of income, tightening charitable deductions, and rethinking inheritance/estate rules.
- There is no consensus; commenters agree the current system heavily favors those who can hold appreciating assets indefinitely and access cheap credit.