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You just delay selling the stocks until death.

At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. So the capital gains tax on your assets are $0 as their cost basis is the same as the price so the appreciate is $0. If _you_ sold the stocks before your death then likely there would be a large gap between the cost-basis (price you bought the stock) and the current price resulting in a large capital gains tax.

So, when your estate sells the stocks to pay back the loan they pay the applicable taxes on the $0 and then uses the remaining proceeds to pay back the loan.

> At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price.

Is this a special provision that kicks in only on death (and not before)? How long has that been in place?

> Is this a special provision that kicks in only on death

To my knowledge, yes [1].

[1] https://en.wikipedia.org/wiki/Stepped-up_basis

> How long has that been in place?

Since 1921 [1]. When the estate tax was in force, it was meant to avoid double taxation. In 1976, the Congress replaced the step-up basis with a carryover basis (you don't pay taxes on death but neither do you step up the basis). In 1980, it repealed the carryover basis "due to the record-keeping problems associated with reconstructing what a long-deceased relative might have paid for properties that had been held for generations," but didn't re-instate the step-up basis. In 2010, the estate tax was repealed. (EDIT: It was reinstated in 2011 in a neutered form [3].)

[1] https://en.wikipedia.org/wiki/Stepped-up_basis

[2] https://greenleaftrust.com/missives/stepped-up-basis-a-short...

[3] https://itep.org/federal-estate-tax-historic-lows-2023/

The USA still has an estate tax.

> USA still has an estate tax

You're correct. Fixed. Would note that it's famously flouted, though usually not in entirety [1].

[1] https://www.bloomberg.com/view/articles/2014-01-30/only-idio...

That Bloomberg article is provocatively named.

You need to have assets about US$13M per person to be subject to the estate tax. So if "only idiots pay" the tax, they are rich idiots.

The Wikipedia article does a poor job of explaining that it is not "step up basis", it is "basis adjustment to fair market value", which may be up or down. They do have a paragraph further down about "stepped down basis", but it still doesn't make the point clear.

It’s called the stepped up basis and yes, only applies to your estate.

A married couple who bought a house in Palo Alto for $250k that’s now worth $5.25M and who bought $250k of Apple stock that’s now worth $20.25M would have a Federal tax bill of ~$5 million if they sold those assets and gave the cash to their kids. If however they were hit by a bus on the way to their accountants office, and the kids inherited the assets and sold them the next day, they would owe zero tax.

There’s a popular myth that estate taxes are a second tax on income but many assets for the very wealthy are never taxed..

^^^ This is the real loophole, the rest is a distraction.

This is because for a long time, the USA does not tax assets other than real estate.

Our tax system is structured around the fundamental idea of taxation occuring on transactions, whether that's income in exchange for labor, income resulting from the sale on (non-real-property) assets etc.

I'm not sure if this is a good thing (it might be, it might not) but it's the way it is.

It's mostly practical, I think. Not all assets can be valued, or are liquid. Once a transaction occurs though you have both a price to tax on and the money to pay the tax.

It’s awfully convenient that this ambiguity in asset prices leads to a massive an unprecedented tax break to the richest people in the country — many of whom are literal experts in valuation.

The reverse approach has issues as well, primarily for assets that aren't easily divisible.

The obvious example is family farms, or indeed the family house. Capital taxing the asset on death means a (potentially large) tax bill happens in many cases this can't be paid without selling the asset.

If the sale was to another family looking for a farm, then that could be argued is neutral. But it won't be. It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms.

This doesn't just apply to property. The family silver collection, the family business, the list goes on.

Inheritance tax is tricky. Just passing money down entrenches an aristocratic class. Taxing it though destroys value in all kinds of areas.

> in many cases this can't be paid without selling the asset.

Ok. And?

Why should someone get $5m for doing bugger all. If they were paid $5m for cleaning a car they would lose a fortune in tax.

They're not getting 5m, that's the point. They're inheriting an asset which may be valued at 5m. Like a farm, or a house, or a painting or whatever.

Forcing the sale of family property or assets does not serve any good in the long term.

> Forcing the sale of family property or assets does not serve any good in the long term.

How is carrying the cost basis forward without stepping it up "forcing a sale"?

It is under a system where ownership transfers are treated as taxable events. The recipient needs to pay the taxes, but cannot afford to without liquidating the inherited asset.

I think you just need to propose a set of related rules changes. Replace the inheritance basis step-up with a similarly scoped rule that says this inheritance does not count as a taxable ownership transfer, so taxes are not due at that point.

You may also need new rules for estimating the basis when records are lost across multiple inheritance events?

The current system is a bit like a tax foregiveness jubilee, but dribbled out to individual families rather than synchronized across the whole economy. It resets things so that regular people can function in this system, without requiring all the family accounting and records keeping of some aristocratic dynasty.

Forcing people to "Sell the family Farm" has been used by estate-tax detractors for so long that there are multiple special programs in place to ensure it never happens (interest-free loans, etc). Given that the current limits are over $13M per person or $26M/couple where zero tax is owed, I don't think this "woe is us" routine resonates any more.

That's exactly my point. The current system is working. We explicitly don't want to go to the place where inheritance forces a sale.

idk, maybe because their parents liked them? Do you really want to incentivize against people working hard to make sure their offspring, has a good life? Also a family-home might have sentimental value, and this really doesn't only apply to rich people, quite the contrary actually.

> Do you really want to incentivize against people working hard...

You mean by taxing labour and taxing commerce?

Sorry for the snark, but come on...

The Roman empire was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed luxury goods and debased their currency. The United States was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed importations and debased their currency.

Since all land was created by God and everything else was created by people's labour, the really unjust thing is to tax labour instead of taxing land. But "territory" is an instinct so deeply ingrained that it's probably been with us for millions of years. However, which other mammals allow members of the same species living on their territory which are not family? As in renting.

> You mean by taxing labour and taxing commerce?

> Sorry for the snark, but come on...

> The Roman empire was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed luxury goods and debased their currency. The United States was built on never taxing labour, because that was seen as an atrocity (never mind the slavery). Instead they taxed importations and debased their currency.

Interesting, even though I don't see if you are for or against taxing labour, commerce or inheritance.

Inheritance tax is a way for the establishment to take land from small landowners. The state isn't a good counterbalance to "greedy" corporations, the state is there to support big business.

> It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms.

Please see Bruce511's comment above, he explains it better than me.

The thing is that with an inheritance tax, you make it impossible for someone to live with little or no money, and caring for their off-spring, by giving them a place to stay.

> Since all land was created by God...

Aha, but in the commandments it says that you shouldn't steal, so having property doesn't seem to be forbidden?

> But "territory" is an instinct so deeply ingrained that it's probably been with us for millions of years

So, is caring for your off-spring, kindness and brotherhood. What is your point?

> Inheritance tax is a way for the establishment to take land from small landowners

In the USA, you must have a net worth of at least US$13M per person to be subject to the inheritance tax.

That's exactly the point. We don't want to change anything that leads to these inheritance tax problems.

That's interesting, I know that other countries do the same, however, but I was thinking about it as a general principle.

My employer likes me and gives me $100k and I have to pay tax.

Yes. It's been part of the tax code since 1921.

https://www.fidelity.com/learning-center/personal-finance/wh...

https://greenleaftrust.com/missives/stepped-up-basis-a-short...

> the current price resulting in a large capital gains tax.

There's nothing special about the capital gains tax rate on such a sale. It's likely to be the long term one, and compared to income tax and taxes in most other parts of the world, it's low.

> But wait, this was a loan, not a gift. So don't you eventually have to pay back the >$1M later from taxed income?

No, you just borrow against yet more stock. You need never sell any, much less pay yourself any significant income, provided you have enough stock. Since you don't sell the stock, you need not pay capital gains taxes. Since you have no real taxable income, you need not pay much in income taxes either.

Pay taxes once vs pay interest forever? At what point it'll break even and go negative?

Let's say every year your portfolio goes up 10%. Every year you borrow 3%. You never pay down the principal, and I think you can just let the interest payment get added to the principal. Also, the interest is tax-deductible.

Let's say you're worth $100bn. You don't need to spend $1bn a year, just even a few tens of $ millions will be plenty, so you're borrowing a minute portion of your net worth. And your stocks will be going up in value, typically, so... you'll never run out of money. Plus you'll be a great customer for the banks that lend you money, so you'll get preferential interest rates. You'll never run out of money. You'll die and still have the lion's share of your wealth, only now it will pass to your heirs and charitable foundations.

> You'll die and still have the lion's share of your wealth

and i don't see anything wrong with that at all.

It seems, recently at least, that a lot of people believe they're somehow entitled to the wealth that these high networth individuals have managed to accumulate.

> and i don't see anything wrong with that at all.

Read my comments on that post. I never said there was anything wrong with that.

IMO we should stop double taxing dividend income.

> a lot of people believe they're somehow entitled to the wealth that

Do not count me among those.

So, same as never selling your stock?

None of that matters. What matters, is if interests paid is more than taxes paid. Which at some point it will be. And at some point both loans and interests will be paid in full. Because its secured by stocks. And assuming there is no other assets, it'll be stocks sold and capital gain taxes paid.

Unless the argument here is that lender will be fleeced due to borrower's death. Which, if correct assumption, is fucked up.

Buy, Borrow, Die FTW - https://equifund.com/blog/buy-borrow-die

The "loophole" that people often complain about is specific to the "buy, borrow, die" tax exemption opportunity. And it's mostly about the VERY wealthy who can really use this until they die.

(1.1) Different parts of America have additional taxes on estate - eg. MA is $2M not $13M, - about 10% of the state has $1M today.

(1.2) Estate tax rate and capital gains rates are different.

(1.3) You can take a tax-deduction on the interest of the loan - if you use it to buy investments. Which is something the ultra-wealthy can easily do.

(1.4) Different assets (eg. Real Estate) have vastly different loans compared to Margin/Portfolio lines of credit

(2) Because the people in question are alive. If you complain about a billionaire not paying taxes because they live off loans, presumably you want that to change. No one complains that Vanderbilt isn't taxed anymore.

(3.1) You definitely don't need 300M to do it, but if you're actually part of the bottom 95%, you'd probably need to liquidate some funds to make it to death, so you can only do this with a small amount of money or you risk margin calls.

(3.2) The "big portfolio" benefit is termed loans instead of margin - banks are way more likely to give you a huge chunk of cash for a fixed time/life if you have a lot more assets.

what you’re missing is that its not controversial or a loophole

sometimes they pay it off, they just dont have to do that every year

yes, you can do it too, but you would need income to pay it

they already have other assets post tax to pay with, if it ever comes down to that

It's leverage. That is all. And tax efficient.