The loophole is that you can get $1M deposited into your bank account, but because it's technically a loan it isn't considered income. This doesn't require a wealth tax, (and getting ex. a home loan shouldn't be taxed as income), but being able to utilize wealth to get a pile of cash that is not taxed is effectively untaxed income IMO.

A wealth tax could address this, but perhaps there are other legislative options, like (partial?) realization of capital gains when used as loan collateral in the income tax code, or something like that. I'd prefer that latter, as it seems more direct.

But I don't know the specific best way to address this, I'm no a tax expert. But, I think its pretty clear that this scheme is an abuse of the system and should be remedied in some way.

This type of loan is really just a form of margin -- the same thing you can get at most stock brokerages (e.g. Schwab, TD Ameritrade, Interactive Brokers, etc). It seems almost impossible to distinguish the purpose of the loans -- e.g. I know people who use these loans to fund primary residence purchases because they lack income for FHA mortgages.

In fact, unless you have a cash-only account, you likely use margin every time you buy & sell a stock. Technically, stock transactions don't settle for 2-3 days. When your brokerage fronts you the shares to immediately buy, sell, or transfer funds, it's all margin under the hood. It gets even more complex once you get into options, swaps, and other esoteric financial instruments.

TLDR: It's simple in principle, but very complex in practice. Further complicating IRS rules is unlikely to win the whack-a-mole competition -- especially when IRS auditors under-target the ultra wealthy to begin with.