Be careful. ProPublica is conflating "wealth gain", aka unrealized, unsold stock gains, with income and actual capital gains.
ultrawealthy typically hold fast to shares in the companies they’ve founded. Many titans of the 21st century sit on mountains of what are known as unrealized gains, the total size of which fluctuates each day as stock prices rise and fall. Of the $4.25 trillion in wealth held by U.S. billionaires, some $2.7 trillion is unrealized
Maybe the trick is simply just borrow for your whole life then when you die pay back the loans but somehow that payback process results in limited taxes somehow.
The ‘somehow’ is the stepped up basis upon death loophole: https://www.thebalance.com/how-the-stepped-up-basis-loophole...
The cost basis of an asset when inherited is set to the value on the day the owner died.
1. Lots of possible deductions. Charitable giving is a big one here. I guess we'll see from future instalments in the ProPublica series which ones were specifically used.
2. You can roll-over loans by borrowing new money to pay back old debt, up to a practical cap of a max % of collateralized share value. And this is worth it if the expected growth on your shares is higher than interest on the loans. But at some point you or an heir will have to realize gains if you want to exceed that practical cap -- or if the loans get called. Bezos could probably raise $2bn for a sports franchise on loan no problem coz that's only ~1% of his shares. If you're a regular billionaire with say $4-5bn in shares, much harder.
The meta point here though is that the taxes are always going to be paid at some point, and deferring that point to the future is fine if the rate of growth on the gov's share exceeds their borrowing costs (currently between 0-2% depending how you look at it).
(Or is that just an urban legend I’ve been told?)
Not for individuals, but when you are a high net worth individual, it's all the same.
Again, if you are going to throw punches you ought to make really sure you’ve done your own homework.
As for the concrete, the important thing here is whether those repurchased shares retain their original cost basis or not (to the grantor) from the IRS's POV. If they do, all that's happened is a complicated tax-free cash transfer. If they don't, then cap gains taxes have been avoided.
So far as I understand the rules, it's the former. If I'm wrong, I'm happy to be pointed to a credible source etc.
In short, the estate pays off the loans by selling stock immediately after death.
Our income/gains taxes avoid confiscating your (hopefully productive!) property by only taxing you on the profits you realize, which both enables and encourages you to keep up what you're doing, producing more prosperity for yourself, your community, and tax income for the government. It doesn't reward you for taking risks, but it doesn't punish you for taking them either. If you take a risk, lose money, and still get taxed on that money you're getting punished for taking a risk.
Imagine you believe that a stock will stay at the same price, so you make an investment that loses money if it goes up and gains if it goes down, and another that moves in the opposite direction. So the two largely cancel out and you make a bit of profit if it stays the same as you expect.
What should you pay taxes on? The amount you actually made or the 'virtual money' that flowed through only to be canceled out on the other side?
Our income and gains taxes are intended to tax you on just what you actually gained, after taking out costs (including the costs of the other investments you made that didn't pan out).
1. Bezos gets lucky and turns $100 of founder shares into $100 billion of unrealized gains.
2. Bezos goes to the bank and gets a loan for $500 million to invest in a diverse portfolio of early stage startups knowing that only a tiny fraction of them will account for majority of his returns.
3. Every year a portion of his portfolio fails, allowing him to sell a portion of his original shares to offset the losses and show a net gain of 0, allowing him to pay no taxes.
4. He hits a Google or Uber and 10xes the original $500mil but gets to continue this scheme of not realizing the gains unless he has losses to match while his control of the universe continues to expand.
https://startupflux.com/jeff-bezos-investment-portfolio-owns...
"Jeff Bezos Investment Portfolio is very large and diverse. he owns a stake in several Very Very large companies that you’ll be surprised to hear. Bezos was one of the first shareholders in Google, when he invested $250,000 in 1998. That $250,000 investment resulted in 3.3 million shares of Google stock worth about $3.1 billion today."
AFAICT, the main objection is he has an obscene amount of money (which fair enough, he does). I'm not sure what your objection to this scheme is in general.
Would you still object if a small business owner did the same thing (which I'm pretty sure is common, just not with startups)?
presumably because he's disproportionately funding "the universe"? All that money on failing start-ups probably lose him more than whatever the stock-disposal tax rate is. What isn't going to the government is directly seeding the economy.
The 10x payoff is taxed. You seem to assume that would still have happened anyway - who would have funded it? Bezos investing in a portfolio created that wealth.
Assume he breaks even: He had to burn through 10$X in order to have $X shares in that 10x company. The tax he would* have paid if not offset against losses, is the same he pays on the unicorn. i.e He gets credited tax on the 10$X, but pays tax on $(10X).
Yes, maybe only billionaires have the capital to make this bet less volatile, but such is as with all things: It's generally easier to turn larger amounts of money into more money as high-capital-requirement opportunities become available to you (not just relating to this), they have still have to have large amounts of capital, and put it at risk i.e more to lose.
The point is, you start from a $100 initial investment that has already turned into 100s of billions of dollars of unrealized gains which you can now selectively live off of without paying a dime in taxes by harvesting losses.
If you had $175M to buy a mansion and paid $0 tax, you must have had $175M of losses as well. To have $175M of losses, you had to have paid $175M for those Theranos and Juicero shares. So you already had $175M sitting around in your bank account a few years ago. You could have just left it there and bought your mansion now. Your scheme gained you nothing, in fact you are worse off because you had to sell $175M of your Uber shares, which you wouldn't have had to sell if you had just kept your $175M in your bank account rather than investing in Juicero and Theranos.
My point is that the $175M you had in your bank account years ago was already realized and fully taxed because it was cash. So being able to spend it on a mansion is fair because it's already fully taxed. You used it up on your mansion and cannot spend it on anything else. If you want to buy a second mansion you'll have to find some new fully taxed money (such as sell more Uber shares and actually pay capital gains tax on them).
> you had to sell $175M of your Uber shares
If you had these separately to the Theranos etc shares, you had to buy them. Since the $175M was a full loss of $175M then that can't account for the (non-losing) Uber shares.
> you had to sell $175M of your Uber shares, which you wouldn't have had to sell if you had just kept your $175M in your bank account
You'd need to know to only invest in Uber, and not in Theranos etc to do this. The idea of the portfolio is you need to invest broadly to allow for the successes. If you kept the $175M in your bank account, you wouldn't be able to achieve that.
>If you had these separately to the Theranos etc shares, you had to buy them. Since the $175M was a full loss of $175M then that can't account for the (non-losing) Uber shares.
Yep. So you had to have more than $175M of fully taxed money at the beginning. But most of that stayed in Uber, only a small percent of the Uber stock needed to be sold. This makes my original argument stronger, but only slightly. Since it only made my argument slightly stronger I didn't bother mentioning it.
>You'd need to know to only invest in Uber, and not in Theranos etc to do this. The idea of the portfolio is you need to invest broadly to allow for the successes. If you kept the $175M in your bank account, you wouldn't be able to achieve that.
Sure. But my main point is that this isn't a method to spend money while delaying tax on it. m_ke seemed to be saying a billionaire can spend money on a mansion without paying tax on it right away, but that $175M at the beginning already had tax paid on it. So the $175M spent on the mansion was fully taxed already.
A diversified portfolio helps with optimizing stock sales to delay some taxes. But enough taxes are still paid early such that every dollar spent is fully taxed by the time it's spent.
But some here would say "OMG he evaded taxes on the $100 Uber gain!"
Tax loss harvesting is not a loophole, it's exactly the right thing to have, and it's available to everyone.
https://startupflux.com/jeff-bezos-investment-portfolio-owns...
Which changes depending on losses. What you are missing is you needed to purchase the portfolio in the first place - The more tax you can write off, the more it mean you lost in the first place.
assume tax rate 25%, portfolio of startup portfolio cost $X.
$UBER_CG_BILLIONS - $X is portfolio unrealised CG. I'll assume this is positive, meaning $X < $UBER_CG_BILLIONS.
Assuming "I sell enough shares" means uber shares (as opposed to some other share),
I sell exactly $X worth of my Uber shares (ignoring what I paid for the Uber shares themselves), which I offset against losses to pay no tax. Since I had to pay $X initially, this is my original investment restored.
I retain ($UBER_CG_BILLIONS - $X) worth of Uber shares.
Where does the $175mil come from? Assuming it isn't the $X I had to invest in the first place, I could sell more Uber shares, but I would have to pay full tax - I already offset all my losses in order to get the original investment back.
TLDR; you suggest $175mil was gained without tax, but without mentioning how much was lost on the portfolio in the first place - presumably more than $175mil.
EDIT: Now assume that $X is $100 for the whole portfolio, per last sentence. How common would an Uber-billions unicorn be for such a small investment to rocket like that. The more diversified your portfolio, the thinner you spread your investment. Uber stock would have to increase by 10,000,000 in value to be worth just 1 billion, even if you only invested you $100 in Uber. It would need to increase by a factor of 1,000,000,000 to be worth "100s of billions".
You sound like the people who say “oh! He avoids tax through charitable donations - he donates $1M and gets a $300k write off”
I'm not saying that he can save money by investing in a bunch of juiceros, just that each year when a few of his investments are duds he has a pool of unrealized gains that he can pull out tax free to match the losses.
No, capital gains tax has brackets -- it isn't a flat 15% -- and the Net Investment Income Tax also applies; for $100M in cap gains, you would pay 23.8% (20% bracket + 3.8% NIIT) on the majority of those gains (everything over $440k single / $500k MFJ).
1) if somebody actually sold say 100M in stock at long term cap gains rates they should be paying roughly 15% tax, but in these cases people paid far lower than 15%, so they must offset those gains with something — what was it?
2) borrowing say 100M and using their large qty of stock as collateral at say 2% interest rate means you can buy stuff with that money then they pay it back later, but how? If they sell stock to pay it back later, then in that year they should have to pay tax in that year.. so ultimately the cash flow needs to be tracked.. if somebody buys a sports team for 2B, where did they get the cash for that? Did they buy it by paying the person in stock?
Would be great to understand how people are doing this kind of stuff because it seems like the old line about “not taxing the job creators” translating to somebody only paying 1% tax might be fine if that was the societal trade we are making but if that person is not actually benefiting society in any way, then that person paying ultra low taxes does seem unfair.