1

I watched an instagram video that got me very curious about this possible tax evasion method. (Link at the end)

Say I own shares of a company, which I bought for an insignificant amount compared to their current value (ie. Assume the capital gains rate of 20% is applied in full to these share prices upon liquidation).

Say I want to buy a $200.000 Ferrari. Instead of selling my shares (and paying 20% taxes on it), I can get a loan for $200.000 and use my shares as collateral.

By defaulting on the loan, the bank may collect the $200.000 (plus late payment fees, default fee) in share values.

In this scenario, is the 20% capital gains tax considered on the claim of the collateral by the bank? Because if I were to sell my stocks, I would need to sell $250.000 worth of stocks to have $200.000 after taxes to pay for the car. By defaulting on the loan, it seems I’m able to “skip” the capital gains taxes.

Video: https://www.instagram.com/reel/CyyfSrXRRju/?igshid=MzRlODBiNWFlZA==

Chris W. Rea
  • 31,999
  • 17
  • 103
  • 191
Bersan
  • 111
  • 2

1 Answers1

1

Yes, the sale of the collateral is taxable. If the collateral doesn't cover your full debt and the bank writes off the remainder - that is also taxable income (at ordinary rates).

In your scenario the bank repossessed the stocks and will get the full 200k value, but you'll be on the hook for the tax. See the IRS article here.

Don't take tax advice from Instagram posts. If needed - talk to a licensed tax practitioner (CPA/EA/Attorney).

littleadv
  • 190,863
  • 15
  • 314
  • 526