Comment by nerdsniper
12 hours ago
Indeed. However, it might make sense to change the definition of "realized". For example, if you use invested capital as collateral for a loan, we could require that it be valued at its basis cost. If you want to use the current market value of the stocks for loan collateral, then the IRS could recognize that the loan institution "realizes" that the stocks have appreciated in value and that the holder of the stocks agrees on the valuation. Multiple parties realized that the stock has a higher value today than its basis cost and expect it to presumably hold at least roughly that value for the duration of the loan.
Using the market value as collateral is in fact one way of realizing the gains: the investor is using the loan to convert their gains on invested capital into something usable. The capital gains tax would only be triggered when the investor utilizes a price other than their basis cost for their financial instruments.
This would probably not affect very many people: 99% of people don't use their retirement stocks as collateral on loans. It would fix the "Jeff Bezos et al. never pay taxes because they just keep getting bigger and bigger loans to pay off their loans" nonsense.
I don't think anyone in D.C. is currently proposing this, but I think it's a nifty idea. Even if the tax revenue generated is modest, it would boost the average citizens confidence that the system is working and not rigged/broken. And that is probably something worth pursuing these days given how dissatisfied voters have been for the past 9 years or so.
This would also apply to farmers when they take out a loan on their land, which they are also unlikely to ever realize, probably for longer period of time then Bezos, et al. I imagine most of rural America, once they figure this out would be very unhappy.
This might be the larger problem with this, since we probably, culturally at least, want more family owned farms and less corporate monster farms. This would not help the current trend away from family owned farms.
That said, it's an interesting proposition.
You can make a specific exception for loans taken out against the real assets of a business to fund capital improvements of that business. Rules would be similar to when you can deduct business expenses.
Getting a margin loan with your stocks as collateral is a couple of clicks away in your brokerage.
Actually weird of so few people make use of it.
A home mortgage is a way better deal most of the time, which is what most people do. Better tax treatment, not callable, etc.