This question is based on this quote from another online resource. I had been reading about common methods of tax avoidance for the super wealthy, and this one didn't make sense to me.
One cunning way of dodging capital gains tax is by borrowing from an investment bank with the shares as collateral after purchasing options, which set their price at a fixed rate.
This sneaky option allows the borrower to avoid triggering the capital gains tax that would come with actually having the money at hand, while giving them the free cash – and allowing them to repay the loan – either from the profits of using the money or by handing over the shares themselves. Talk about making your money work for you.
I don't really follow this strategy, and I would appreciate someone walking through a fictional example to illustrate how it works.
Here's as far as I understand it, using made-up numbers: you borrow $10 million, using $10 million in stock as collateral which you give(?) to an investment bank like Goldman Sachs.....but then I got confused when it said "after purchasing options." (I know what options are, I trade them; the issue is not that I don't understand what they are. Only that I don't understand the strategy here.)
Then the next paragraph really ratcheted up my confusion. You're repaying the loan with the cash you got from the loan? What? I've totally lost what they're saying.
What exactly is the sequence of actions here, and how do they benefit the wealthy individual who's doing it?
