Not familiar with the US tax code, but if Musk borrows $1b with a portion of his Tesla stocks as collateral, will he be charged capital gains tax by assuming that these stocks are now worth $1b?
No one is saying Musk literally can't afford to pay taxes. He can borrow against his ownership. But if you have a company that goes from 0 -> 100, and you get taxed 35% on that, and then the company goes from 100 -> 50, you kind of got screwed. That $100 is a made-up number.
Suppose there is a company with 200 shares, half of which you own. The last trade price was $1 per share, meaning you have $100. But you can't necessarily dump your shares for $100 because the $1 was based off the last trade. So on the margin you can sell a share for $1, but you won't necessarily be able to sell all 100 shares for $100.
Imagine you own a home that went from being worth $1 million to $2 million. Did you MAKE $1 million? Should you pay taxes on that delta as soon as the home's value became $2 million? It makes more sense to wait until you sell it and pay taxes on the net you made. Otherwise it's more complicated and you could end up paying taxes on $1 million when you end up selling it for a lot less. You could have a tax credit I guess but you're unlikely to have the IRS cut you a check for the money you paid that turned out to never be actualized.
Details depend on jurisdiction, and exact legal structuring.
(Eg where I live, there's no capital gains tax, so someone like Elon Musk could just sell their shares without any extra taxes, instead of having to borrow against them.)
His tax situation really has nothing to do with it. If he sells his Tesla shares, he's still going to owe CA tax. But he never has to sell any Tesla shares, he can just buy hedges against them and take out loans. If you have sufficient capital assets, you never have to actual earn any "income" or generate any "capital gains" if you don't want to.
That’s not true, converting one asset class into another or in fact any trade would normally trigger a capital gains tax, it’s currently complicated with crypto because it’s new and haven’t been fully tested yet as far as the law goes.
From Tesla’s perspective they don’t care they assume and rightfully so that you are responsible for any taxes and accounting obligations on your end, it’s not any different than buying a Tesla with normal currency from profits you haven’t paid taxes yet on.
It doesn’t even have to be a trade with a mutual exchange, if you say want to gift a house to your kids or your spouse and you transfer ownership you’ll be liable for capitals gain tax even tho no sale has actually occurred.
It’ll entirely be long term gains, so I wouldn’t say huge as a percentage. I would also venture all kinds of other things are being written off to reduce the tax burdens. Typically people like Musk don’t sell stock but use it as collateral to take out low interest loans, which avoids taxes.
Yes, these billionaires take collateralized loans, but that doesn't change the fact that they will eventually HAVE to pay taxes. At some point, Bezos has to realize some gain somewhere to have cash to pay back the loan — and odds are, that will be taxed as capital gains, the rate for which has been essentially constant since WW2.
You mean like when Musk sold $1.5B in Tesla shares and paid $0.5B in taxes (33% rate) but then Propublica complained $0.5B was a small amount of taxes compared to his overall wealth (ignoring the rate for the transaction).
Yeah, but those taxes are based on the value of the shares today ($1.5m) minus what it'll cost him ($4k).
Even though he's not actually profiting on that difference yet, you still usually owe taxes on it. So we're talking hundreds of thousands of dollars in taxes.
No. His stock was near zero when he acquired (created) them. He'll pay full cap gain rates when he realizes them (which is 15% cap gains rate which is not too bad for him; I pay a lot more on my labor gains). He owes no tax until then. If you received stock worth , say, one million , you might want to sell 1/3 to pay the tax. Otherwise if stock price goes to zero you've got a million in losses to write off which is hard to do without a million in gains to offset it.
To me, the parent wasn’t saying an asset holder would need to pay taxes on the asset unless they used it as collateral. To me, this makes a lot of sense. If someone owns a startup and worries tax implications would overextend them if the value was taxed, they shouldn’t use it as collateral on a loan.
I'm not sure about in the US but in the UK that would be a tax efficient way to do it, as entrepreneurial capital gains are taxed at a much lower level than income.
Don't some banks let you take out a loan for the amount of the capital gains taxes using the shares as collateral? I'm not sure but I could've sworn I heard about this.
Someone would only pay taxes on the stocks if they sold it, via capital gains. If they're just being taxed on income, they can use that income to pay their taxes. Or am I misunderstanding you?
Do you have to pay this 1% tax on stock you own in companies you've founded? I.e. would the founder of a successful new startup that had such a high valuation in its last round that his stock was worth $50 million on paper have to somehow come up with half a million dollars every year to pay taxes?
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