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Comment by ironrabbit | Hacker News Reader

Genuine question because I'm out of the loop: it looks to me like the "Bezos doesn't pay taxes" argument is just pointing out that most of his wealth sits in unrealized gains in amazon stock. When he sells stock, he pays taxes. Is there more to it that I'm missing? Is the prevailing argument that we should be paying taxes on unrealized capital gains?

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This is my current understanding:

Basically, once you're this rich, you can take hundreds of millions or billions of dollars worth of loans to cover anything you'd like to spend. Now, you can make sure that you're actually "losing" money in any given year by having (almost) no realized income. Then, at the end, you die, having never paid taxes.

https://www.nytimes.com/2021/06/09/briefing/tax-jeff-bezos-w...

https://www.propublica.org/article/the-secret-irs-files-shor...

EDIT: Yes, this is a big part of why there's now a common argument that unrealized (but very large) capital gains should be taxed.

> once you're this rich, you can take hundreds of millions or billions of dollars worth of loans to cover anything you'd like to spend

Didn’t ProPublica show, in their leaked tax returns, that Bezos doesn’t do this?

But you have to repay those loans eventually incurring the tax burden when you do, right?

You die without ever selling your stocks. Your heirs can pay off your loans by selling some of the stocks they inherit. Their cost basis for those stocks is their value at the time of inheritance. This way no capital gains tax is ever due on the stock gains made in your lifetime.

At the amounts you're talking about (100s of millions of $$), virtually all of that stock would be subject to the federal estate tax, with the vast majority of it at the 40% top rate.

Those unrealized gains you're talking about are one of the main reasons the estate tax was enacted ~100yrs ago...

Yes, in practice there are more tax sidesteps via foundations, etc. But the step that wipes the capital gains liability is as described.

Sure but Bezos’ heirs will certainly blast past the exemption on the estate tax, which exists specifically as a backstop against this type of situation. They will pay taxes on most of what they inherit.

That’s what trusts are for! To avoid the estate tax.

> Their cost basis for those stocks is their value at the time of inheritance. This way no capital gains tax is ever due on the stock gains

Are you sure that's the way it works in the US? If so that seems somewhat absurd. In Canada there's no inheritance tax but capital gains are realized on death and the cost basis resets. So your heirs inherit the assets and an associated tax bill which honestly makes perfect sense to me (at least for things like stocks).

yep.

https://taxfoundation.org/tax-basics/step-up-in-basis/

https://www.investopedia.com/ask/answers/073115/how-cost-bas...

For Bezos (and the wealthy in general), the interest rate on the loan is lower than your capital gains, so you can just keep rolling the loan forward forever.

And the interest is sometimes tax deductible

Yep. It's a great setup if you can get it (for yourself at least).

Interesting, but how do you pay off these loans except by later selling stock (and paying capital gains tax)?

When you die, your heirs get the stock with "step up basis", meaning the cost basis used to calculate capital gains resets to the market price at time of death. So if they sell right after you die, they pay no capital gains tax.

I'm no super genius, but it does sound like simply changing the tax code to require paying back all loans before changing the cost basis would be both easily and less possibly catastrophic than all of a sudden taxing unrealized gains.

The heirs get the stock at etc step-up basis after estate taxes, which are considerable in the $100m+ realm...

Estate taxes can be avoided with trusts.

Heirs in the United States don't pay capital gains tax, but doesn't the estate of the super rich guy have to pay up to 40% in estate taxes on all his assests (with an exemption on the first ~$5M)?

Jeff Bezos is worth $200B. If he died, his estate would have to pay 40% estate tax on $195B in assets (first ~$5M being exempt), which is $78B in tax. That's still a hell of a lot tax. I know there were some loopholes used by the Walton family and other super rich, but isn't the above how it's supposed to work?

> 40% estate tax on $195B in assets (first ~$5M being exempt)

I think you mean $199.995B, but doesn't change the outcome much anyway.

You die without selling them. Your heirs inherit the stocks at current market value: your capital gain liabilities are not inherited. They sell some stocks to repay the loans. Your gains are never taxed.

More loans.

> "Yes, this is a big part of why there's now a common argument that unrealized (but very large) capital gains should be taxed."

So how will the person pay for those taxes WITHOUT selling the underlining asset.

This is a huge problem in startup land with something called AMT. Where you "on paper" are a millionaire but have no ability to sell your paper shares since the company hasn't IPO yet.

I'd hate to live in a word where you have to pay taxes on unrealized gains because it's not like you're going to get a tax break for unrealized losses.

Do they need to sell to pay their taxes? Government could just accept the shares as payment in kind, plenty of uses for them without selling: sovereign wealth fund, state pension fund, employee owned trust.

I would imagine that what would end up being implemented would be more nuanced. If most of your on-paper net worth is unsellable assets, I don't think it would be much of a stretch to say those wouldn't be subject to a hypothetical wealth tax.

Tax law has plenty of examples of various assets having unaccessed value until it's sold. Publicly tradable shares have value because I can sell them to someone for a fairly visible price. If I can't sell it, you could make the argument it's really not worth anything.

AMT also happens plenty to non-startup world people. Own a house and have a combined household income of >200k? You're probably dealing with AMT.

Let's pull on this thread some more.

So if I purchase a home and it's my primary dwelling, and the fair market value of my home goes way up (like more than what my homestead cap is) - I should pay INCOME taxes on this UNREALIZED gain?

See why this is so bonkers.

Don't get me wrong, I'm totally in favor of the super rich to pay more in taxes ... but they are not using any "loop holes" here or getting preferential treatment. It's just that they have radically way more unrealized gains than ordinary people do.

It'd be interesting if all those people who had huge unrealized Bitcoin gains had to start paying ordinary income taxes on it.

In the comment you replied to, the commenter says:

> If most of your on-paper net worth is unsellable assets, I don't think it would be much of a stretch to say those wouldn't be subject to a hypothetical wealth tax.

Wouldn't a primary dwelling fall under this umbrella?

I don't think so.

A home is a tangible asset easy to sell. Paper shares in a startup is totally different.

In the UK this is how they planned to fund social care. Taxes would be collected when you sell your home but "levied" earlier.

It was labelled the Dementia Tax and was deeply unpopular.

You or me would sell stock and pay taxes.

He borrows against the shares, which keeps his votes while cashing out non-taxable income.

But wouldn't he need to sell stock eventually to service the loan payments?

Yeah- but you postpone it indefinitely, or pay it back in a year where you have negative income or other circumstances that afford a better tax situation.

Or get sneaky and attempt other "creative" legally questionable solutions, like having an entity you control buy that debt from the bank and hold it while giving you a 0% rate, or something similar.

Not necessarily. The wealthy put up $-worth of shares as collateral to borrow $$$$-worth of money from the bank at low interest rates.

The bank doesn't just sit on those shares, they use them to generate money for themselves. For example, say the Bank takes $250M in Amazon shares from Bezos and loans him $1B. If the bank projects that the price of Amazon is going down, they short that $250M in shares.

If Bezos did need to pay off one bank, he just borrows from another.

It's the other way around? You borrow substantially fewer dollars than the value of the shares you pledged as collateral so that the bank doesn't call the loan if (when) the value of the shares changes.

For you and me, you are right, but those on the top get to play by different rules.

Also, while it's called a loan, think of it more like a credit line.

Well, does it seem like he has realized any gains? The prevailing argument is that as a society we do not have to let one individual amass this much power. It's ok to hold that view without having a deep enough understanding of tax law to know what needs to be changed.

I think it's very reasonable to hold that view (I do as well). But to propose a solution, it's necessary to understand the facts of the current situation, which is what I'm trying to learn.

From an ethical rather than a legal standpoint, I'd argue that when you use stock as collateral to secure a loan you are in fact realizing a gain. This is a common practice and the stockholders then deduct the coast of loan service from the tax liability that they do incur. It's kind of a racket.

I don't think you're missing anything - the sense I get is that it's primarily a knee-jerk political response. I suspect people like to take cynical negative views of things because it's both easy and a common method of trying to signal wise-ness, rarely is it applied consistently though. Bezos is just extremely visible and people take the positive space stuff as an excuse to 'well, actually' be 'contrarian' and negative. Irony though is this seems to be the mostly conventional political position anyway.

https://slatestarcodex.com/2014/08/14/beware-isolated-demand...

On the specific tax stuff, you can borrow against holdings and then pass them on when you die (I think people that inherit it get the cost basis 'stepped-up' to whatever level they get it at). This means some of that tax value on gains isn't collected.

It's all tied up in unrealized gains for the most part and since it's typically associated with massive non-zero-sum wealth creation - I'm not sure why it matters.

If people want to go after inheritance rather than taking wealth from people that actually created it, I suspect there would be a lot more support.

Interesting. Resetting cost basis upon inheritance does seem like a massive tax avoidance loophole, I can't quickly think of a reason why this should be allowed. I agree also that this would probably be a popular (and sensible) modification to the tax code.

Part of me wonders if the same group of people trying to take away the wealth created by others have both not created much of their own and stand to inherit a lot from their parents.

I don't know - but I have a hunch that a lot of these voices are often trust fund kids, or kids of wealthy parents. It'd be an interesting paradox if they're suddenly against policy that may affect their inheritance.

Currently though inheritance is protected up to fairly extreme monetary amounts (in the US anyway) so the change would have to be fairly dramatic.

If you ask Elizabeth Warren, yes.

Bezos doesn't sell stock. What little he does goes into Blue Origin and is written off again. When Bezos needs cash, he just borrows from the bank using his shares as collateral. No taxes.

Borrowing mean returning the money at some point. Where does this money come from, and how isn't it taxed?

Person dies, wealth gets inherited at new cost basis, heirs pay off loans with new (higher) cost basis, tax revenue isn’t collected.

At least that’s the model as I understand it.

I assume this means the banks are giving > 40 years loans? Isn't inheritance tax fairly high? A quick search says 40% federal, with around 20% state.

IIRC estate tax doesn't kick in until after ~$20M? I don't really know much about this particular area of tax law though so I wouldn't rely on my comments.

> tax revenue isn’t collected.

If you completely ignore estate taxes, this would be true.

Yeah you're probably right - my tax knowledge of this area is not great since I haven't had to care about it.

I think that kicks in after $20M?

This is not true. He realized $4 billion in gains in that ProRepublica article people referenced, and he regular sells shares.

https://www.forbes.com/sites/rachelsandler/2021/05/11/jeff-b...

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