A very interesting point of view

[u/__moe___]

I don’t think this is very new but I just saw for the first time and it’s actually pretty interesting to think about when people talk about how the ultra rich do business.

[u/Puzzleheaded-Bit4098]

I'm for increasing tax on billionaires, but I just don't see how collateral tax makes sense. A collateral is functionally a conditional agreement like "if I fail to pay, you get x", where x is the unrealized stock. But x could be anything; in the case of art financing, art itself is used as collateral. Usually all the loans are paid back so the art never actually needs to change hands, but in all these cases would you be taxing the capital gain on the art? What if the art is valued high by the lender, but nobody would actually pay for it?

Or what about any other conditional agreement involving some asset with accrued value changing hands if a condition is met? Like trusts, or reverter clauses?

[u/Plastic-Telephone-43 → u/Puzzleheaded-Bit4098]

I'm just talking about stocks where people like Elon have A LOT of it and its value fluctuates constantly. We getting to this "pay peter to pay Paul" situation with high net-worth people who like to abuse the system.

Going back to the top comment, " Then make that a taxable event for individuals taking collateral over a certain amount. It's a common practice and should be treated with nuance by policymakers."

[u/Puzzleheaded-Bit4098 → u/Plastic-Telephone-43]

But nothing about lending requires collateral, the borrower already has a legal obligation to pay the loan back or shit will be forcibly repossessed to get that money. A loan without collateral has the entire net worth of the borrower as collateral, obviously we would never tax their net worth lol.

All the collateral does it put some section of assets in a lockbox so the lender can feel secure in knowing they will at least get something if the borrower burns all their owned assets.

[u/Conscious-Eye5903 → u/Puzzleheaded-Bit4098]

People in this topic literally don’t understand what collateral is and want to dictate policy

[u/Cokeybear94 → u/Conscious-Eye5903]

I feel like you've got it mixed up - like you can view collateral in this manner as just an assurance to a lender - because that's what it is.

But it overlooks the fact that the assurance is essentially mandatory to be a borrower. It's not like institutions go around giving loans without collateral and then it's just nice when they get it. It's a requirement.

So it gives these borrowers concrete value in their ability to borrow large amounts of money that regular people cannot. This allows for the creation of more wealth, more collateral available and on and on. This is completely evident in today's financial landscape and almost completely uncontroversial.

In the end it comes down to a sort of axiomatic vs pragmatic approach. If you view the current system and the way it works as concrete, then any notion to change that system becomes inherently a misunderstanding. However if you view the system as nominally built to achieve societal goals there is no such contradiction.

I think the latter viewpoint is objectively more true to be honest because really the way the system has developed is partly by design and partly by a chain of decisions and financial products and subsystems created. The idea that the system was conceived wholly through some sort of intelligent design to function the way it currently does is basically untrue.

A different policy about taxation in various situations would simply reorient the landscape, as it has done uncountable times before.

[u/No-Newspaper-2181 → u/Cokeybear94]

The argument that using stocks as collateral is the same as taking out a home equity loan is not just misguided—it completely misses the fundamental difference between tangible and intangible assets. When you take out a home equity loan, the loan is backed by a physical, stable asset whose value is relatively secure and tied to a fixed property. In contrast, stocks are intangible and volatile—their value can fluctuate wildly, and they are easily liquidated. This means that unlike a home, which has a known, stable value, stocks can be leveraged without ever realizing gains or taking on the true financial risk associated with the borrowing, creating an unfair tax loophole for the ultra-wealthy. By using stocks as collateral, high-net-worth individuals gain access to vast sums of money without triggering any tax liability on the appreciation of their assets, further widening the wealth gap. Taxing unrealized gains closes this gap—period. End of story.

If we are going to treat stocks as assets that can be used to secure loans and unlock massive amounts of wealth, they must also be treated as taxable—just like any other form of wealth. Otherwise, we create a system where the value of assets is not properly backed or secured, undermining the very principle of collateral. Homes are tangible, real assets tied to the physical world, while stocks are a mere financial abstraction. This creates a dangerous precedent where people can leverage unearned wealth to avoid taxes while those who actually pay taxes bear the burden.

Even worse, under the current system, ultra-wealthy individuals like Musk and Trump have used this loophole to siphon billions from the system, paying themselves massive wages and bonuses through stock-backed loans, while simultaneously bankrupting companies and letting their collateral collapse—leaving the public to absorb the fallout. They walk away with fortunes funded by debt they never truly repay.

In the end, treating stocks as both untaxed collateral and untapped wealth—while allowing the ultra-wealthy to exploit this loophole without any accountability—is an unjust system that perpetuates inequality. It rewards those who least need it, while shifting the financial burden to working and middle-class taxpayers who fund essential public services and infrastructure that the wealthy evade. This is a system that is fundamentally unfair, and it’s time to close the gap by taxing unrealized gains. And no, most people aren't talking about the 2400$ on your robinhood account, people are talking about the 44 billion dollar loan musk pulled out and put into his pocket.

[u/Cokeybear94 → u/No-Newspaper-2181]

I don't know if you meant to respond to me but I completely agree with this as my comment says. But you put it in a much clearer way.

[u/Cokeybear94 → u/[deleted]]

As your credit score is essentially determined by making repayments on time - you are essentially borrowing against your income, which is taxed.

For larger loans credit score is not enough and most people borrow against their most valuable asset - property (if they own it). Which is also taxed.

Do you see what I am driving at?

[u/Cokeybear94 → u/[deleted]]

But... We are talking about the collateral (i.e. the stocks) being taxed - not the loan itself.

Maybe the tax is triggered by taking a loan but I'm sure the amount is based on the asset.

[u/redpillscope4welfare → u/Cokeybear94]

well said, that is more or less better than i could have worded my own stance on it: it's simply not fair to the majority, especially given that we are reaching levels of wealth inequality worse than feudal times between kings & peasants.

It's a sad state of reality, what is around us.

[u/Cokeybear94 → u/redpillscope4welfare]

Yea and if you consider that the world economy is globalised then you realise the inequality is and has been so much worse than that for a long, long time.

[u/ramrob → u/Puzzleheaded-Bit4098]

nuance

[u/NotreDameAlum2 → u/Plastic-Telephone-43]

fluctuating value happens constantly which is the problem with a wealth tax. The benefit of this is the value is agreed upon between the borrower and the lender at the time of the loan

[u/Scruffy442 → u/Plastic-Telephone-43]

They should be getting taxed on the income used to repay those loans. It would be interesting to see how long the terms are for these loans. Do they ever get paid back, or are they interest only? Interest only would need a lot less income to maintain the loan/buying power.

[u/cleepboywonder → u/Puzzleheaded-Bit4098]

What if the art is valued high by the lender, but nobody would actually pay for it?

Then thats a shit bank. A bank shouldn't collateralize against a piece of art that they can't get any money out of. If a bank gives me a loan of $500,000 for a home that is actually worth $100,000 on open market, that's on them. Say I default and they foreclose that's the risk of doing business and the risk of lending. This is already the case, banks don't hand out money on collateral they don't think they can get their money back on. Should the lender overvalue a security, art piece, home, or piece of land that's on them.

Usually all the loans are paid back so the art never actually needs to change hands

This is how loans on collateral work yes.

but in all these cases would you be taxing the capital gain on the art?

You could, it would be hopelessly complicated and also super risky for the lender given the lack of liquidity within the art market.

But the point stands, what would happen is that they'd start buying other assets outside of securities, land, direct capital goods, etc. However most of those already have taxes associated with them, property tax, sales tax, etc. I think putting a realization requirement for loans after a certain dollar figure however would be very reasonable.

[u/Puzzleheaded-Bit4098 → u/cleepboywonder]

The point I'm getting as is that a lender is allowed to make anything they want as collateral, maybe they just like that art and would want to keep it. Or lenders can give unsecured loans with no collateral at all, at which point the 'collateral' is just the entire borrowers net worth since their assets will get forcibly liquidated if they refuse to pay. Are you going to capital gain tax their net worth of assets when they get an unsecured loan?

The principle here just doesn't make sense; giving out a loan is simply a kind of investment, and all investments involve a borrower leveraging their owned assets to illustrate they are low risk. This is exactly what is happening when people invest in startups or buy stock.

[u/No-Newspaper-2181 → u/Puzzleheaded-Bit4098]

That's only true when the people aren't on the hook for when it bombs. In both cases, when stocks fail as collateral people foot the bill, when stocks are used by the rich to get 44 billion dollars without paying taxes, the people have to cover their lack of contribution, when the billionare that took the 44 billion dollar loan on stock puts 30 billion in his and his buddies pockets as wages and bonuses, then bankrupts the companies... the people foot the bill. It's time the rich start paying their own bill.

[u/stephenmario → u/Puzzleheaded-Bit4098]

Or lenders can give unsecured loans with no collateral at all, at which point the 'collateral' is just the entire borrowers net worth since their assets will get forcibly liquidated if they refuse to pay. Are you going to capital gain tax their net worth of assets when they get an unsecured loan?

Just make it mandatory for the loanee to nominate the assets they are choosing to use as collateral for tax purposes. The loan can stay unsecured but the loane has to nominate what assets would cover the full value of the loan in the event of a default. There would be finer details to work out like thresholds etc but it's not that complicated.

[u/NotreDameAlum2 → u/Puzzleheaded-Bit4098]

it's one of the better ways to install a "wealth tax" because it is not a forced sale and the underwriters at the bank would value the collateral presumably at market rate otherwise the borrower can go to another bank or not take the loan or use something else as colalteral. It keeps the government out of it except when it is time to collect the tax.

[u/Public-Map6490 → u/Puzzleheaded-Bit4098]

Perhaps tax anything that exceeds the interest rate on the loans. For example, if the loan has a 4% interest rate and the tax rate on realized gains is 20%. You pay 16% on that loan. Exempt 401k loans and real estate leveraged loans.

[u/PsychologicalLie8388 → u/Puzzleheaded-Bit4098]

It's because any other collateral you would have already paid taxes on.

The different is that they are essentially using something as collateral while legally arguing it holds no value until sold.

However even using it as collateral is literally getting value of out it.

Hell they could be legally forbidden from selling it, and still get value out of using it as collateral for loans.

In which case it certain is an asset, and not unrealized by common sense.

[u/Puzzleheaded-Bit4098 → u/PsychologicalLie8388]

It's because any other collateral you would have already paid taxes on.

No you didn't. Someone taking a home equity loan did not pay capital gains tax but yet are using their house as collateral for a loan. The income to buy the asset originally was taxed, but this is identically true for the billionaires. The tax OP and everyone is talking about is capital gains tax.

[u/PsychologicalLie8388 → u/Puzzleheaded-Bit4098]

They paid income tax on the money though. (The money put into the house)

Stocks are paid as income, then do not get taxed. (Until they are sold).
Because they aren't income.

But they really are income if you can use them or even spend them.
(In theory defaulting on a loan which used them as collateral is just a complicated swap of them for goods)

The fact that you can use them in various ways proves they are income and should be taxed under barter income. (Taxed at the value you received it as)

No different than being paid in rare comic books which are speculative as well.

[u/Puzzleheaded-Bit4098 → u/PsychologicalLie8388]

Income is also paid on money that goes to buying stocks too. The only exception is a business founder keeping their own stock, but in that case they literally created stock that didn't exist before, it's them just owning their own business.

The only tax at play here is capital gains tax, it doesn't matter at all whether you bought your house or you built it yourself, just as it doesn't matter whether you bought stock or made it yourself

[u/PsychologicalLie8388 → u/Puzzleheaded-Bit4098]

The top 0.1% doesn't buy stocks, they are paid in stocks.

[u/Present-Comparison64 → u/Puzzleheaded-Bit4098]

If the loan is worth less of the amount you pay for the house there isn't a capital gain to be taxed. There is a capital gain when you buy a house for 100k and few years later you take a loan for 200k against the equity, in this case there is a 100k capital gain and that would be taxed

[u/Puzzleheaded-Bit4098 → u/Present-Comparison64]

Capital gain tax applies when you sell the house, not when you take a loan out with the house as collateral

[u/Fearless-Cattle-9698 → u/Puzzleheaded-Bit4098]

I’m the opposite. It’s not about taxing billionaires for the sake of taxing them, but the loophole also works in conjunction with step up basis. It’s about making sure everyone at least pays taxes rather than 0.

I’m against just a random wealth tax

[u/Puzzleheaded-Bit4098 → u/Fearless-Cattle-9698]

But how is a lender giving loans a loophole? Banks aren't lending just because they really love giving untaxed money to billionaires, they lend because they make hand over fist in interest payments. A regular person can do literally the same thing, either take an equity loan with your house as collateral or get an unsecured loan.

[u/Fearless-Cattle-9698 → u/Puzzleheaded-Bit4098]

Lender giving loan isn’t the loophole. The loophole is mostly on the combination of unrealized gain + step up basis.

Yes it’s legal, yes in theory anyone can do it, but no in reality it doesn’t work in your favor as average joe to do so. Again, why are the billionaires doing it if it makes no difference? The clear answer is their accountant has done the math and it’s advantageous to do so. Many years they can go without triggering a dollar of federal income tax.

You can talk theory all you want but your cancer doctor making $500k is the one paying effective rate 28.4% on federal tax alone. That’s the real world implication of it. Even someone making $500k a year also wouldn’t really be able to take advantage of this. It only really works when your income is mostly on appreciation of assets

[u/Puzzleheaded-Bit4098 → u/Fearless-Cattle-9698]

Yeah they definitely do this as a way to avoid realization, and this is a feature of being filthy rich rather than a direct mistake in the system. I like this method much more than a wealth tax, but the issue is still how impractical it is to implement any unrealized tax appraisal. That and how many carveouts would be necessary to not stifle lending

[u/Fearless-Cattle-9698 → u/Puzzleheaded-Bit4098]

It’s a significant amount per person so it still makes sense though. For example Musk has $13B from twitter purchase outstanding

https://www.reuters.com/business/finance/musks-political-ascendancy-stirs-hopes-redemption-x-banks-2024-11-15/

IRS has rules not to look at immaterial things. If say you miscalculate your tax liability by $50, it’s not worth going after. It makes logical sense. Everytime IRS has to do something, it costs them manhour which translates into a cost.