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From this NYT article (https://www.nytimes.com/2024/08/29/us/politics/donors-harris-tax-ultrawealthy.html):

"The billionaire minimum income tax could be particularly costly for ultrarich tech executives who derive their wealth from owning slices of companies they helped start. Rather than selling their shares of companies, triggering taxes, those Americans can take out tax-free loans backed by the stock they own to finance their lifestyles."

So say a founder of a tech company is worth 500 million Dollars according to his stake in the stock of the company. If he were to sell some stock, he would pay 20% capital gains tax (assume long-term holdings at highest income bracket). According to this article, he can use his stock as collateral and just borrow the money from a bank.

My question is if the founder borrows 100 million Dollars from the bank, he will still have to pay back 100 million Dollars with interest no matter how many years down the line. Wouldn't he still have to sell stock eventually to pay back the loan? So how is this "cheaper" than the 20% capital gains tax? And what if his company goes bankrupt? Then won't those shares become worthless and he won't have a way to come up with 100 million Dollars plus interest?

ronald christenkkson
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Wouldn't he still have to sell stock eventually to pay back the loan?

Yes they have to pay it back, but the question is when do they have to pay it back. In theory they might have absolutely no concern for family and dependents in which case they get to shrug and say "That's for my estate to figure out. I'll be dead so I simply don't care that my estate finally has to settle up." More commonly it's part of a tax management strategy. They can pick a time to sell when it's most advantageous to their overall tax bill (say when they've had losses on other investments). They may also be worried what the news that the founder is selling off a huge block of stock will do to the stock price. Much better to get a loan now, and sell the stock to repay the loan gradually over time.

While not without risks these kinds of loans often get very favorable interest rates because they are collateralized, and the wealthy individual has excellent credit. On top of that the money can be put into high yield investments. As long as everything goes well, enough can be made on the investment to pay the interest and the eventual tax bill, and still come out ahead.

As a paper billionaire you may really want that $100 million dollar yacht/mansion/social media company, but you simply don't have cash for it. If you cash in $100 million in stock, you have to pay the government $20 million off the top, so you still don't have enough. But then the nice bank comes by and offers to loan you $100 million to buy that yacht. You see that your cash flow is sufficient to pay the interest, and we all know that the stock is only going up, so you'd be a fool to sell the stock now.

won't those shares become worthless and he won't have a way to come up with 100 million Dollars plus interest?

A famous saying is that if you owe the bank $100 that's your problem. If you owe the bank $13 billion, that's the bank's problem. Typically though stocks don't go to zero overnight, and you can be sure that the loan agreements contain provisions requiring partial repayment or additional collateral if the value of the stock declines significantly.