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Comment by jedberg | Hacker News Reader

My Etrade account has that option. But I don't use it because it's risky. If you take out a loan collateralized by a stock, the stock could drop and you'd owe a lot of money.

Selling the stock locks in the gain. Now, if you only need say 1/2 the value as cash and can absorb the risk of the stock going down, then it makes sense. Or if you want to "buy insurance" by taking out an opposite short position, that would also make sense. But that short position will cost you money too.

So it's not as straightforward as "just take out a loan". You need a very good (and expensive) tax accountant to run the numbers and figure out the best strategy for your situation. Most people can't afford that.

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Why isn't there an option to take out a loan where a repayment option is to transfer the capital asset (at whatever the value happens to be at the time of repayment)?

I.e. I don't get why the risky part of this loan can't be mitigated by the bank taking on the risk and managing it separately. Surely, there would be investors willing to back these types of collateralized loans?

You'd need a crazy high interest rate to account for market volatility. If the bank could make accurate predictions as to the future value of the stock, they would just invest in the stocks.

Loans against other assets are much less risky, because they are backed by actual things. If the bank screws up in predicting the future value of a house, they can still own the actual house and land if you default. With stocks it would be far more risky because stocks are far more volatile than houses.

Hm, is it possible to define a range for "crazy high interest"? As the debtor, I'd be willing to pay up to the difference in long-term and short-term capital gains (~15%). I guess where I'm going with this is: I don't understand why the average person ever pays short-term capital gains tax.

> I don't understand why the average person ever pays short-term capital gains tax.

Because the risk of holding the stock is more than the difference in short vs long term capital gains.

If the stock is worth $1000 in gains, I know I can sell it and lock in the gains today and pay my normal income rate. If I have to hold it for another 6 months, there is a huge risk that it drops more than the 5-10% difference in the tax rate for the average person.

I pay STCG on option contracts written and on (profitable) short sales (where the holding period is defined to be short-term).

Other positions have a defined thesis and, if that thesis gets invalidated, I close out the position sometimes at a gain. I do try to make most of my gains be LTCG, but trying too hard to optimize capital gains rates can lead to poorer investment decision-making/asset allocation.

> ... bank taking on the risk...

Banks don't take on risk. Seriously.

That's another conversation to have, but the simple answer is do you want the value of your checking account impacted by someone else's purchase of Gamestop, or Enron?

And that's why banks don't take risk.

Banks loan money, and every loan includes some risk. If banks didn’t take on risk than the 2007/2008 bailouts wouldn’t have happened.

I should have clarified - banks don't take on market risk.

You can simulate what you want by simultaneously buying an at-the-money protective put and selling an at-the-money covered call. Then regardless of future stock price movement, at expiration (i.e. when the "loan" needs to be repaid) you always transfer the stock away.

Now why don't you plug in this scenario into any Black–Scholes calculator and see how much of a net credit at entry you get (if you even have one). That would be the maximum loan amount you'd be able to get under this scheme. If you could get one at all, the loan amount is tiny compared to the value of the asset.

Taking the short position on a stock you own is called selling short against the box. I don't know much about it, just had heard of it, but it sounds like it's been regulated in the US (to reduce its use for tax avoidance) since 1997.

https://www.investopedia.com/terms/s/sellagainstthebox.asp

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