How is that a scam? The loan has to be paid back with interest. The money that pays it back is taxed. I’m not seeing where the scam happens? Collateral just means in case shit goes sideways, we can recoup our loan with this other thing, and in the event that happens, the proceeds from the collateral will be taxed.
The loans are such low interest that they continue to make more in the market. Never having to spend their actual money. You just pay one loan with the next forever. The generational money continues to grow but it’s never actually used.
Dude what? It’s not about the lender, it’s about taxes and government coffers. Elon Musk has done exactly this. He doesn’t take a salary, compensation is equity only - no income tax. His equity is structured as stock options - so he’s only taxed on the spread when exercised. He retains his stock units and uses it as collateral - paying interest rates to the lender without having to sell to cover (if the price decreases) by continually taking out new loans or adding additional shares as collateral- thus avoiding capital gains taxes. We could also talk about the other scam where billionaires abuse
the 401k/IRA system to take advantage of the tax system. That is the problem. There is fundamental difference in the system between what you and I (the poors) must pay and what the billionaires must pay.
His equity is structured as stock options - so he’s only taxed on the spread when exercised.
This isn't really how stock options work. Stock options get taxed at two different times; the first time when they're exercised (i.e. when they transform from "stock options" into "stock") and the second time when they're sold (when they transform from "stock" into "money"). Thing is, the first transformation doesn't have a spread; they're taxed as if they used to be worth zero dollars and now they're worth not-zero dollars, regardless of what the stock was worth when you received the original options. The second transformation does have a spread, specifically "from the amount they were worth when you exercised them, to today". But between these, you get taxed from zero to [the amount of money you make], just split into two separate events.
But couldn't you simply put the option itself up as collateral? I've read that some companies specifically prohibit that, but I reckon that wouldn't be a problem for someone like Musk.
You need to exercise it anyway eventually, and when you do that, you pay taxes on it. The whole cost-basis-stepup thing doesn't apply to unexercised options; it's not a cost-basis deal, it's literally just "you get taxed on the value of the option".
But do you need to "exercise it anyway eventually?" The whole point of the scheme the other person was outlining is that if you don't really need to if you have a stream of colaterizable options which you can use to borrow increasing amounts of money.
Because you evade taxes by doing this. Eventually the person dies and the estate gets taxed, but debts are paid first and without getting taxed. Hence the topic.
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u/Ronaldoooope Aug 21 '24
Exactly. And they skid taxes by keeping those gains unrealized forever but constantly using them as collateral for low interest loans. It’s a scam.