Hacker News Reader

Comment by TimPC | Hacker News Reader

Capital gains being delayed is not a direction we want to pursue. There are huge problems with unsellable stock in venture-backed start-ups and other situations where you can end up owning a massively valued asset that you can't sell to pay the taxes on. Said asset could go to zero without you ever realizing money. I don't think people should lose their start-up stock over taxes, or face putting their entire wealth on the line on a gamble the company pays off. Keep in mind it's not unheard of to have stock worth $2+ million for an early employee in a company that goes to zero. Even more relatable to the average person: If your house price goes up too quickly you can be forced to sell to afford paying the capital gains on it.

View on HN

To me, the parent wasn’t saying an asset holder would need to pay taxes on the asset unless they used it as collateral. To me, this makes a lot of sense. If someone owns a startup and worries tax implications would overextend them if the value was taxed, they shouldn’t use it as collateral on a loan.

I may be missing your point though.

But you basically always do use your house as collateral on the mortgage loan. I think this is a more radical change than you have realized.

You could pin it to when loans are issued rather than their existence.

That would only affect home refinancing, which will still be a considerable number of people.

That's different, because the house is collateral for itself, effectively a "rent to own", not for money that can be spent elsewhere.

I agree, I don’t see why income tax couldn’t be levied on any amount greater than $X borrowed/secured by an asset as collateral.

For all intents and purposes, it is income and should be taxed as such.

I don't see why we care that they're using an asset as collateral for a loan. They still need to pay back that loan with post-tax money.

Maybe they're kicking the can down the road, but that's their choice.

The real issue here is that super rich are, at the end of that road, donating shares to their non-profits, tax free. ...and that their children then have access to that non-profit and all of its assets, again without income or estate tax.

The big hole here isn't the unrealized gains - it's the "charitable Foundations" that are a complete scam.

In the UK at least, the 'trick' is that the load is never actually repaid, or is continually deferred.

> and that their children then have access to that non-profit and all of its assets, again without income or estate tax

That shouldn't matter as long as they don't start to enjoy the benefit of those assets.

This means tax rules should separate the estate as a business/investment from the personal use of the funds/wealth.

Sure, at some point it becomes neigh impossible, like let's say Bill and Melinda went to Africa on their marriage anniversary, was that business or personal? (And yes, at that level of wealth, influence, income it's always both.)

When an owner (or close relative or friend of an owner) of a family trusts/foundations/estates/NGOs/church/non-profit conducts business through said entity, that entity should pay some tax corresponding to said expense as if some part of that expense were income to the owner/relative/friend.

> Maybe they're kicking the can down the road, but that's their choice.

I can't just say "Oh, I'm investing 30% of my income, tax that part when I sell later", I don't have that choice of kicking the can down the road.

tldr; The rich, there kids and grandkids will never pay taxes under the current structure.

The problem is you're not kicking the can down the road, you are delaying it forever. Your entire 'Lifestyle' can be funded tax free. Instead of things being your assets, that you spent money on you could have a company plane, car, boat, house. Lavish dinners can be put on the company card as 'business meetings' and travel as 'Business Travel'. This is all taken out of your business profits and the best tax structure for a business is at a loss or barly profitable. Add that to the point OP made about taxing collateral loans is it would semi-eliminate the 'loophole' of never having to pay taxs.

Edit: One more point. Should a $1m donation to scientology be considered a tax writeoff?

> They still need to pay back that loan with post-tax money.

Unless they pay back said loan with another loan. Given the massive amount of wealth accumulated, you can rinse and repeat indefinitely. Basically you have a free cash flow machine, without ever having to convert that income as proceeds (unless you want to convert between asset types).

Having said I agree with your main point: we need to close the loopholes, and the charitable foundations is the biggest of all, and sadly the article missed the point entirely.

The annoying point is that those foundations are not at all charitable.

Collateral for a loan is a completely separate point. The issue was taxing unrealized capital gains. Effectively if your house goes up $100,000 you'd owe the government the capital gains tax on $100,000 immediately, not when you sold. If you don't have the money to pay for the capital gains you're looking at selling the asset. Finding the money to pay capital gains while paying down a mortgage isn't a direction I'd want to go in.

Of course, in the USA, outside of California, this is essentially what we do.

We can argue about whether or not it's good, but its not unthinkable. Property taxes in most places (in the USA, the subject of the article) are linked to the current market value of real estate. Sometimes property values rise, taxes follow, and people have to move.

Property taxes are such a small portion of property value that they seldom force a move. Capital gains can be anywhere from 20-50% depending on country. Having your home go from 800,000 to 1,000,000 and having your property taxes go from 4000 to 5000 a year is very different from having your home go up 200,000 and suddenly owing the government 40,000 to 100,000 dollars.

As I understand the proposal, you wouldn't owe the tax on $100k immediately -- that would only happen when you use the house as collateral for a reverse mortgage or similar. This makes sense to me, because the capital gains are effectively realized when used as leverage.

Parent was arguing to not delay capital gains at all, as was the article. I'm pointing out how that idea is bad.

I agree with you. This makes even more sense as in: if a lender lends you $x against a collateral of N shares, this means that they consider that there is only a tiny chance that said shares may be worth less than $x before the maturity of the debt. So this means that for all practical purposes we could decide that there are at least $x of realised gains. (In a more extreme version you could even consider that all your shares, and not just the N shares used as collateral, should be valued at $x/N per share and treat the gain as a capital gain for tax purposes)

In your house example. this is only if the homeowner takes out a loan against the new increased value of the house, and then pays tax on a portion of that loan. If your house appreciates and you don't play financial games with it, the only increase in costs would come from a local tax reassessment.

I think it is assumed a wealth tax would not require taking out a loan. You can assume that your home would be exempt, but more likely it will just be a standard allowance deductable.

This isn't a new thing. Property taxes are the wealth tax that already exists, at large.

That is... You're point on a tax reassessment is exactly what is being discussed. And if the tax on your wealth is increased as a form of capital wealth, expect the rates to be higher that most property taxes.

Edit: I see I missed that this was a hypothetical on touching collateral. Not sure how I feel on that one. In large because I know so many folks are essentially tricked by marketing to refinance all the time.

So if you decide to refinance your mortgage that would subject you to a tax? What is wrong with just paying increased property taxes?

I'd be happy if I could give a percentage of the shares themselves to the government as a tax payment (paying tax on the shares specifically), so I don't have to worry about the risk that they're overvalued by the tax agency.

You might be OK with being taxed in the form of some of your stocks, but would you want to be taxed partial ownership of your real estate based on increase in its market value? What about private high-risk equity in a venture you started by risking all of your own money? It could go to zero (or millions) in a decade, but for now the government becomes an increasing shareholder because of its current YoY volatility...

Taxing non-income wealth increases by any means incentivizes the government to manipulate the prices of those assets -- and more than any other entity, the government possesses the power to do so through regulation and legislation.

It also makes the government the eventual largest capital owner, which could create all sorts of unintended consequences. It could sit on those assets indefinitely (like it does its liabilities) instead of selling and using the money to fund itself. There's a special kind of poverty that exists when the government owns almost everything.

Also, there's a big difference between legal worth at a given time and fungible value at that time. The difference (or lack thereof) between the two could itself create all sorts of opportunities for gaming the system when fungible value becomes a basis for being taxed.

OK. You seem to be agreeing that this would be a fine system with those caveats.

So: Exemptions specifically covering residency already exist in finance law. If you go bankrupt, you can still live in your house (only if you owned it, mind).

The government, as soon as practical, can auction the stock it receives. Thus identifying its value and releasing the funds.

> You seem to be agreeing that this would be a fine system with those caveats.

I'm not advocating anything in particular. I'm only pointing out some potentially serious issues with the proposed system.

Sure, primary residence could be excluded. But that doesn't change anything about what I said, except perhaps blunt the initial impact on the middle class.

> The government, as soon as practical, can auction the stock it receives. Thus identifying its value and releasing the funds.

Perhaps that could be part of the tax law. I doubt it would stay that way... once the government can own stocks and portions of real estate, I'm sure it will seek to incrementally increase its benefit from doing so. I shudder to imagine politician-beaurocrats as the most powerful hedge fund managers of tomorrow.

> once the government can own stocks and portions of real estate, I'm sure it will seek to incrementally increase its benefit from doing so.

There's nothing stopping the government from owning these things already (governments own plenty of real estate, in particular), so this seems like undue cynicism.

There's a big difference between agencies owning buildings within which to do business (or the BLM owning vast swaths of land for environmental preservation) and the IRS maintaining a real estate asset class.

In fact there's almost no comparison to be made between the two.

Regarding the government's ownership of real estate, I suggest you are simply mistaken, e.g.:

https://www.forbes.com/sites/bisnow/2017/04/11/solving-the-m...

That article is talking about local governments, not the federal government.

Ctrl-F "federal government" suggests otherwise.

This is now really a bad faith argument.

You've moved the goalposts (again), and declared that your new goal wasn't met (when, in fact, you just ignored that part).

It's OK to admit you were wrong <3

I don't think I've moved goalposts -- maybe just failed to articulate my concern precisely. (And only skimmed the article you linked.)

If the government purchases real estate with its own money and later sells it--fine by me. They have business to take care of and need places to do it.

What bothers me specifically would be a growing federal or state government stake in assets owned by others by virtue of a tax law that grants them such ownership.

I imagine whole swaths of businesses, apartments, and other buildings in cities across the US that are >50% owned by the government 40 years from now.

It would push us a lot closer to a world where people don't own anything anymore besides their own houses (maybe not even that) and the government owns everything.

> It would push us a lot closer to a world where people don't own anything anymore besides their own houses (maybe not even that) and the government owns everything.

I'm really struggling to understand this point of view, given the article that you couldn't be bothered to read says the US government owns 15% of all real estate already.

In my country, the reason that a lot of people own their houses is because the government sold its housing stock to residents in the 1980s and 1990s. That created a majority of homeowners, for the first time.

The fact that the government didn't replace this housing stock has been the cause of a massive generational rift, with a reduction in owner-occupancy from that peak, down to the point that a plurality of people (the vast majority of people under 45 - almost all young families) are now private renters in insecure housing situations.

While that same housing stock - originally built by the people, for the people - is increasingly dominated by exploitative for-profit landlords.

It would be OK with me as long as I could buy back the government's stake in my house from the government by paying the tax in dollars.

Huh? The government owns a percentage. The asset doesn't really matter. It would be a lein, to pay back at exit, not a voting share or whatever.

How is that different from capital gains tax?

Unless you mean a series of leins incurred once a year based on price increases. But then an asset with high YoY volatility but no long-term gain would cause the lein sum to approach the value of the asset over many years, despite no material increase in price at exit. That makes no sense - the government profiting off of volatility alone.

If that's not what you mean, how is what you mean different from standard capital gains tax?

This would be a very interesting way to handle percentage taxation on assets like that.

Either pay %x in cash value or give %x percent of the item to the government.

Of course likely the government would just want to liquidate immediately but you could perhaps set it up as a "lien" on the stock/bond/property that gets satisfied at final sale.

They'd want to liquidate as soon as possible, but they might have to wait for a liquidity event like an IPO to do so.

I'm not sure the lien would really be any different than how capital gains taxes work today. Assuming you stayed in the same tax bracket every year.

For many situations it’s the same but there are cases where you have to pay tax on vesting Stock but have no way of selling the stock to pay the tax. It’s rare but it can occur.

It’s supposed to work out in the end as you have a higher basis at that point but you still have a liquidity issue.

No, you wouldn't. Unrealized gains being taxed would eventually make you declare bankruptcy or live on the street. The government wouldn't let you pay in stock but sell stock yourself.

So, unless I miss what you're saying, is that you propose that the government own a share in every business that is created by way of "taxation". Is that not what you're proposing in this statement?

Do they also get to leverage these shares to have a vote as to the business decisions, like any other share holder does? (assuming they have enough shares in this hypothetical share tax)

Not my idea, nor one I think is perfect, but I assume they are saying this would no be every company, just those where they would rather give shares than pay tax.

No doubt they would be loads of ways to scam this though, setting up supposedly valuable companies to 'pay' a big tax bill, then rinse the company or allow it to fail while diverting profit elsewhere.

I was just saying, it sounds an awful lot like forced communism through taxation. A share in a company is a portion and a vote in a company, however small.

I can't think of a way to scam it, as long as they only allow this method of payment for taxes assessed on the asset itself, rather than as a substitute method of payment for other taxes owed.

It would be an interesting idea to explore and could potentially be a massive boon to risky startups by allowing them to hand out equity more freely as incentives without worrying about the accompanying tax burden.

The government is taxing you anyway. I'm not proposing a new tax, I'm proposing more flexibility on how they accept payment. Right now, they only accept the taxes to be remitted in dollars.

For simple income tax, where you're paid in dollars and hand the government a percentage, that's fine.

But what if you're paying a tax on, say, some equity you were given in a startup?

This can cause huge trouble for people who have illiquid assets, like equity in a private company. You have to pay tax in dollars based on a guess of the value of that equity, even though you can't trade the equity for dollars (it's not liquid). When you eventually can sell the asset, like at an IPO, its assessed value could have decreased and it might be worth even less than the taxes you already had to pay on it.

That's the kind of gift you don't want to receive.

I'm suggesting that, for those who are worried about that risk, the government allow you the option of handing over a percentage of the asset instead. If it ends up being worthless paper, then the government gets nothing, but on the other hand that's also the correct amount for them to get because the tax on $0 should also be $0.

Most likely, the government would choose to (or perhaps by legislation could be compelled to) sell the asset at an IPO, but that's a detail. Perhaps they could also have an agency for managing and directing such assets in the public interest.

So the government would then be partial owner to your restaurant or mechanic shop? The government would then be partial owner to your catering business or flower store?

I cannot think of a more complicated mess as the government being part-owner of half the small businesses in America.

It's called a lien, payable at liquidation, and it's a simple accounting object.

>a massively valued asset that you can't sell

In this case, the value is not well defined. If you don't have a market, you cannot determine the value. You may think it's extremely valuable, but if you have no one else willing to recognize that value, then it doesn't really exist.

The value is precisely defined by a 409a valuation. That's the price options are offered at (the strike price) and what the FMV is.

Aren’t 409a valuations famously gamed?

It is a bogus valuation... as it is not market based. If you can't sell the stock, and nobody wants to buy it, (yes, there are startups that are in this position), then that valuation is mostly wishful thinking. Often the valuation undervalues the company as well, but that's another story.

That's the value when the valuation happens, which can be years before exercise.

A house's capital gains actually have special treatment. But in some states property values for taxes do rise by huge amounts.

No different than me selling stock A, paying capital gains and then buying stock B, which could go to zero.

You can handle your hypo the same way the tax system handles mine. You can deduct the capital loss from future gains.

Sure it’s different. You might not have cash to pay those taxes. When you sold and bought, you had an opportunity to set aside the $$ to pay taxes

If you are borrowing money, you have the opportunity to set that money aside to pay taxes. It's really no different.

It's not easy to get a loan against illiquid assets in many cases. And even if you get a loan, if the asset goes to zero you still owe the loan balance, which could be huge compared to your normal finances. And you pay interest on that loan.

It could work in some cases but I don't see how it's the same as selling stock A and buying stock B.

You may never have future gains to match the loss.

Why would we want a system that taxes people on an unrealized gain and then (maybe) gives it back to them over coming years?

> You may never have future gains to match the loss.

C'est la vie. That's how Capital Loss deductions, Electric Vehicle credits and other non-refundable tax credits currently work: individuals may not have enough upside to maximize their benefits, That's just how the system works as it is impossible to balance everyone's competing scenarios. If you are eligible for a $7500 EV credit but only paid $3000 in taxes, you'll only get that $3000 back, and not the full $7500.

Most American's live in that system, it's called being an employee...

I think we'd want that tax income because a dollar today is more valuable than a dollar tomorrow - making sure we increase cash flow in the short term and stabilize expected cash flow allows us to more accurately set the budget.

Or, perhaps, stop accepting payment that may be valueless when you try to access it. And stop trying to get paid in a way that hides your income from the tax system.

Reply on news.ycombinator.com