In case you were curious as to why rich people often borrow against their stock portfolios instead of taking a paycheck, it’s because loans aren’t income, and so aren’t taxable. We call it “income tax” because we tax income… and a loan isn’t income.
Commissioner vs. Glenshaw Glass in 1995 was a case about something unrelated but the case did simplify the definition of income:
Income is realized whenever there are "instances of:
undeniable accessions to wealth,
clearly realized, and
over which the taxpayer has complete dominion (control).
Notice the word “and” in line 2. It has to be all three to be income and thus taxed. Or put another way, if it doesn’t meet all three criteria, it isn’t taxable income.
A loan against your own assets (such as stock) is not taxable income (unless forgiven) because it is not an “undeniable accession to wealth”… since you have to pay it back. The fact that many bankruptcies are the result of debt is proof that a loan isn’t an “undeniable accession to wealth.”
I would hope that anyone who has been paying attention to the ever-widening wealth gap and ballooning federal deficit already understands one of the major reasons it is happening (as you plainly laid out in your post). I think the question is whether we want to continue letting it happen.
Except that’s not the reason rich people do this.
You don’t have to pay it back, at the end of life.
One of the reasons the rich stay rich in the USA is the “step up in basis”. The rich can live on loans from investments and live a good life. The assets in stocks and bonds that have appreciated magically appear tax free to the heirs. If sold during the owner’s lifetime THAT would be income.
So this is a way that some babies start out life poor. Other babies start out life rich. G*d must decide which ones are which.
Seriously, that’s what it’s been called for many years now.
You can also borrow against your own assets in high-income years to reduce(AGI/MAGI) and forgive the debt in low income years. People often structure large capital gains this way, such as the sale of investment properties.
My FIL has some stocks bought in the 1960s. He can’t sell it for just this reason. He hasn’t borrowed against these stocks at all, it’s just a crushing tax burden if he needed the money, so it’s going to sit there until he’s no longer around.
That is great news to hear. I took out a major, $10’s of millions loan on my good looks and intelligence which are major assets to anyone that has them. The interest on it is easily paid back from the loan proceeds and I can still live to a ripe old age and die in comfort. When I die who cares if it is not paid off because I’m dead! That’s where the intelligence comes in!
