Yeah I'm in favor of leverage == taxable event. I think the meaningful difference between leveraged and unleveraged capital gains is that when you take a loan, you access liquidity via your ownership in the asset. If you had gotten a dividend, that would have been taxable. A loan with a stock backing it isn't the same thing, but it does have a somewhat similar effect.
You still need to pay off that loan eventually though.
These asset backed loans are just regular loans with lower interest rates. So instead of getting $50M @ 11% they can get it at 4%. That's the extent of the "hack".
They then keep the ball rolling by refinancing at each expiry and just paying the interest (and hoping their assets maintain or increase in value)
Eventually those loans will need to be repaid and the money will need to come from realizing capital gains.
So if anything its a tax deferral scheme with a low interest rate and elevated liquidation risk. Which all raises the issue of being taxed twice on the same money. Taxes once when you take the loan against it, and taxed again when you realize the profit to pay the loan.
The trick is that the USA steps up the buy price of an asset when you pass away. So if you use cheap loans your whole life, you can defer capital tax until it goes away.
Instead of two certainties in life being death and taxes, it's now death or taxes.
Eventually those loans will need to be repaid and the money will need to come from realizing capital gains.
Uh, yes. But they can be repaid with refinanced loans based on the same assets... So no guarantee that the gains will be realized. And in the possibly long interim between loan issuance and maturity, the owner accesses liquidity via the asset and pays nothing in taxes.
Which all raises the issue of being taxed twice on the same money. Taxes once when you take the loan against it, and taxed again when you realize the profit to pay the loan.
To clarify, I advocate that the loan issuance be a taxable event, where the cost basis of the shares are adjusted to the current price of the asset. So there would be no double taxation.
It doesn't require the debtor to pay back the difference between the collateral liquidation value and the loan value.
I don't think any bank though is giving non-recourse loans for risky or depreciating assets (investors do that). It's usually for things that the bank is confident will be a good investment anyway if the loan goes sour - you default on the loan? Fine. But we keep the land.
For late-stage “startups” (e.g. Series D+ companies that have just not IPOd) they have done this in the past, but that was in the pre-COVID tech mania.
Often they act as middleman, finding someone else that wants exposure to the startup when interest is oversubscribed.
Why not? I could say the that it is unfair to tax people on income that they haven't spent too. Or property taxes raising for a property they haven't sold. If I wait to pickup my payroll check until after the year rolls over despite earning that money already, should I not pay taxes on it for that previous year?
Because the valuation of equity is notional only. It may not be remotely realizable now or ever. Furthermore, it may not be possible to use it as collateral for a loan for both legal and practical reasons. Some notionally high value assets have no liquid market. It make take a decade to find a real buyer. The large majority of assets held by wealthy people are non-liquid, in the US most studies put it in the 60-70% range.
Your paycheck is denominated in cash money. It can’t go to zero or be non-liquid for years like an investable asset. That’s a rather important distinction.
That seems like a buyer beware situation. Nobody forced them to invest money in it, and if they lose out in the end that is the risk they take, the same with any other investment. You can't buy a piece of commercial property and not pay any taxes, or start a business and then claw back taxes you already paid because it failed later on down the road.
That is typically the case (depending on the timeline) for all but publicly traded or relatively sought out/well known private firms. Even for many of those, it’s not going to be easy.
You can’t just go out and start selling stock to the public without a huge amount of legal paperwork.
If you're bootstrapped, borrow a bunch of money to pay tax because your company got to $10M val. But then the market shifts and it goes back down to $0 in later years, do you get the money back?
Even if you do, it sounds weird taxing someone for the right to create something, especially when they're still in the middle of creating it.
The paper spots that this pseudo-wealth tax would be better for more founders.
> Moving from current realization-based to accrual-based taxation would reduce founder ownership at exit by 25% on average but would also increase the fraction receiving positive payoffs from 16% to 47% when tax credits are refunded.
Founders would use VC money to pay the tax and get a refund if the startup fails, since the capital gains were never realized. Therefore "pre-paying" capital gains would be a good thing for most founders since otherwise a liquidity event wouldn't happen for 84% of them.
This only happens with a tax on unrealized capital gains, though, not a normal wealth tax.
Another corollary is that "zombie startups" would be heavily discouraged, since "failing fast" could result in a payout.
It is basically forcing them to dilute more, which is better for them on average because the shares expire worthless so often anyway.
That said a higher percentage of positive outcomes does not mean much when the majority of significant wealth is in that small percentage of high value firms founded.
> It is basically forcing them to dilute more, which is better for them on average because the shares expire worthless so often anyway.
Well no, because VCs might not give you money to buy chunks of the business as they want the money to go into the business.
An unrealized capital gains tax forces VCs to give founders money during funding rounds to cover taxes, money that is refunded to the founder in the event of the business going under.
This means you no longer lose everything in an unsuccessful exit, because you get a refund on the capital gains that you didn't end up having.
I have worked about half time over three decades on a problem which I recently solved and am developing for a new venture. "Simple" conceptual solution - which took a long trail of reframing to get to. The complete solution is a layered series (actually a cycle) of partial solutions. Each partial solution except one from fields I never expected to be involved. Lots of work left to implement well, but this is the "easy" part.
Getting taxed on any increases in value early would feel very unfair. I have already put in so much value, for nothing in liquid/credible valuation yet, that things would have to go very well to compare equitably with what could sensibly have been expected if I had accrued half-time earnings, continuously saving and investing that income in its entirety, for over three decades.
Further worries: If I don't want to accept any venture capital, and at least for the foreseeable future bootstrap, would I somehow be forced into needing to liquidate ownership based on some accrued wealth rule anyway?
Hopefully not.
But if capital raises are the trigger for accrued wealth taxes, even a small raise after bootstrapped success gets ugly. Imagine raising capital after achieving bootstrapped success, by selling 1%, only to have to pay taxes on 99% of the company's new valuation! That would create a severe disincentive to take any capital ever, after bootstrapped success.
My suggestion: Only tax valuation gains on the sold shares. The realized valuation gain on capital raising shares passes (indirectly) to owners. The realized gains on any owners shares sold to cover those taxes would also pass (directly) to owners, as usual.
That would bring corporate capital raises into exact tax parity with normal owner stock sales.
The only difference is practical: The cash from an indirect sale (capital raise), goes to the owners indirectly (into the company), and is taxed indirectly (pass through). The cash from a direct sale (same sale percentage, but by each owner independently), goes directly to the owners, and taxes are assigned directly.
Either way, taxes are now identical.
(A third case, where all owners sell the same percentage of stock, and agree to all inject the funds into the company, might be a circuitous way to operate, but again, taxes are identical. Taxes on realized gains become sale path and cash purpose neutral.)
I'm on team "I wanna get rich" and also team "I want you to get rich". I'm also on team "I'm a programmer and not a CPA and definitely not your CPA". I pay a money person so I don't have to deal with this stuff because it's not interesting to me, but for those who do find it interesting, game on!
I will say though, that the most important thing someone ever pointed out to me was 100% of $0 is $0. Even just 65% of $really big number is still > $0
The conversations around taxation and gov finance in the USA are absolutely delulu. I'm in California. Not including sales and property taxes, high earners are paying over 50% in taxes. Whereas the overall expenditures are unsustainable and in many cases just not working anyway. Notable examples are that we are paying more in Interest than for military at the federal level, and we are burning cash on failed homeless policies without any hope of actual change. Any rational conversation has to cut spending.
> Notable examples are that we are paying more in Interest than for military at the federal level,
It is interesting to me that the party that runs on fiscal responsibility is the one that runs the highest deficits despite having a lower amount of GDP growth.
Yep. But they had to include federal to get above 50%, so that's clearly not the calculation they were doing. For federal + California, it does matter.
100%, This is the uncomfortable fact of taxes in the US right now. If you are a high earning W2 worker, you are likely paying close to if not above 50% income tax rate. Pretty much on par with all the "high tax" European socialist countries you always hear people complaining about. There is basically no good way to lower this w2 tax burden.
I'm generally a "liberal" and support fair taxation and goverment spending, but the current level, based on the worldwide tax rates I've found, doesn't have much room to grow, especially when it does seem like goverment services are actually supbpar for many, and these taxes don't support some sort of universal health care/cheap university like they do in many European countries. I truly believe that goverment can and should be a force for good in people's lives, but I don't think that means we should give it a blank check. It does feel delulu that so many democrats seems to blindly support raising taxes on the "rich". I do think a wealth tax is very much the wrong approach.
It's pretty frustrating to when folks talk about taxing the rich, since it seems like the policies that get passed often just add even more burden onto the "working" rich vs the capital based rich. Even the long terms capital gains rate is close to 30+% in high tax states + top bracket, but there is way more room for deductions.
An alternative is graduated capital gains rates based on total assets owned (ideally skewed higher, like 10, 50, 100MM, …). Exemptions like QSBS could still be applied. This would allow shareholder control issues to remain unaffected, which wealth taxes never seem to address.
Not sure how to apply it on the corporate side. There are also multi entity workarounds to consider.
> Using comprehensive new data on U.S. venture capital deals, we find that founder returns remain extremely skewed, with 84% receiving zero exit value while the top 2% capture 80% of total value.
This theory seems to be BS, If let us say a founder is raising a seed round of 2m at 20m valuation, then according to hypothetical accrual tax rate, they would need to pay a tax of ~ 3-4m.
Quite funny that half of the team who wrote this hail from Switzerland, a country where there are no taxes on realized capital gains, much less unrealized ones.
Sure but tax on wealth is a tax on the integral of gains and trying to imagine a tax only on realized wealth seems like it would interest Switzerland but is difficult with real estate and stock markets.
Doesn't seem fair to tax someone on appreciated stock if they haven't sold and haven't taken any loans against it.
Yeah I'm in favor of leverage == taxable event. I think the meaningful difference between leveraged and unleveraged capital gains is that when you take a loan, you access liquidity via your ownership in the asset. If you had gotten a dividend, that would have been taxable. A loan with a stock backing it isn't the same thing, but it does have a somewhat similar effect.
You still need to pay off that loan eventually though.
These asset backed loans are just regular loans with lower interest rates. So instead of getting $50M @ 11% they can get it at 4%. That's the extent of the "hack".
They then keep the ball rolling by refinancing at each expiry and just paying the interest (and hoping their assets maintain or increase in value)
Eventually those loans will need to be repaid and the money will need to come from realizing capital gains.
So if anything its a tax deferral scheme with a low interest rate and elevated liquidation risk. Which all raises the issue of being taxed twice on the same money. Taxes once when you take the loan against it, and taxed again when you realize the profit to pay the loan.
The trick is that the USA steps up the buy price of an asset when you pass away. So if you use cheap loans your whole life, you can defer capital tax until it goes away.
Instead of two certainties in life being death and taxes, it's now death or taxes.
I have to congratulate you on the quip at the end there, which I'll steal! Great way to summarise this strategy. Is it an ENGNR original?
Eventually those loans will need to be repaid and the money will need to come from realizing capital gains.
Uh, yes. But they can be repaid with refinanced loans based on the same assets... So no guarantee that the gains will be realized. And in the possibly long interim between loan issuance and maturity, the owner accesses liquidity via the asset and pays nothing in taxes.
Which all raises the issue of being taxed twice on the same money. Taxes once when you take the loan against it, and taxed again when you realize the profit to pay the loan.
To clarify, I advocate that the loan issuance be a taxable event, where the cost basis of the shares are adjusted to the current price of the asset. So there would be no double taxation.
A tax deferral that could last millenia.
non-recourse loans don't require payback in case the startup goes under
It doesn't require the debtor to pay back the difference between the collateral liquidation value and the loan value.
I don't think any bank though is giving non-recourse loans for risky or depreciating assets (investors do that). It's usually for things that the bank is confident will be a good investment anyway if the loan goes sour - you default on the loan? Fine. But we keep the land.
For late-stage “startups” (e.g. Series D+ companies that have just not IPOd) they have done this in the past, but that was in the pre-COVID tech mania.
Often they act as middleman, finding someone else that wants exposure to the startup when interest is oversubscribed.
Why not? I could say the that it is unfair to tax people on income that they haven't spent too. Or property taxes raising for a property they haven't sold. If I wait to pickup my payroll check until after the year rolls over despite earning that money already, should I not pay taxes on it for that previous year?
Because the valuation of equity is notional only. It may not be remotely realizable now or ever. Furthermore, it may not be possible to use it as collateral for a loan for both legal and practical reasons. Some notionally high value assets have no liquid market. It make take a decade to find a real buyer. The large majority of assets held by wealthy people are non-liquid, in the US most studies put it in the 60-70% range.
Your paycheck is denominated in cash money. It can’t go to zero or be non-liquid for years like an investable asset. That’s a rather important distinction.
Allow for deferral, but at the risk-free rate. If the asset goes bust, the tax isn’t owed.
At least in the case of stock, it’s possible they can’t sell it to pay the tax
That seems like a buyer beware situation. Nobody forced them to invest money in it, and if they lose out in the end that is the risk they take, the same with any other investment. You can't buy a piece of commercial property and not pay any taxes, or start a business and then claw back taxes you already paid because it failed later on down the road.
That is typically the case (depending on the timeline) for all but publicly traded or relatively sought out/well known private firms. Even for many of those, it’s not going to be easy.
You can’t just go out and start selling stock to the public without a huge amount of legal paperwork.
Especially if it is illiquid
The taxes would be refundable.
How does that work in practice?
If you're bootstrapped, borrow a bunch of money to pay tax because your company got to $10M val. But then the market shifts and it goes back down to $0 in later years, do you get the money back?
Even if you do, it sounds weird taxing someone for the right to create something, especially when they're still in the middle of creating it.
Yes, you do get the money back, that's the point of the paper.
This is better for many founders that otherwise wouldn't cash out at all. VCs will be forced to cover your unrealized capital gains taxes.
Would they pay interest?
The paper spots that this pseudo-wealth tax would be better for more founders.
> Moving from current realization-based to accrual-based taxation would reduce founder ownership at exit by 25% on average but would also increase the fraction receiving positive payoffs from 16% to 47% when tax credits are refunded.
Founders would use VC money to pay the tax and get a refund if the startup fails, since the capital gains were never realized. Therefore "pre-paying" capital gains would be a good thing for most founders since otherwise a liquidity event wouldn't happen for 84% of them.
This only happens with a tax on unrealized capital gains, though, not a normal wealth tax.
Another corollary is that "zombie startups" would be heavily discouraged, since "failing fast" could result in a payout.
It is basically forcing them to dilute more, which is better for them on average because the shares expire worthless so often anyway.
That said a higher percentage of positive outcomes does not mean much when the majority of significant wealth is in that small percentage of high value firms founded.
> It is basically forcing them to dilute more, which is better for them on average because the shares expire worthless so often anyway.
Well no, because VCs might not give you money to buy chunks of the business as they want the money to go into the business.
An unrealized capital gains tax forces VCs to give founders money during funding rounds to cover taxes, money that is refunded to the founder in the event of the business going under.
This means you no longer lose everything in an unsuccessful exit, because you get a refund on the capital gains that you didn't end up having.
That's how progressive taxes work? It's generally considered a better outcome when the taxes are paid by people who can more easily afford them.
Sounds like when I have a major tax bill, me and some friends should found a startup with poor prospects for success
Waiting for the comments to roll in so I can see if most hackernews commenters view themselves on team Exception or team Rule.
I have worked about half time over three decades on a problem which I recently solved and am developing for a new venture. "Simple" conceptual solution - which took a long trail of reframing to get to. The complete solution is a layered series (actually a cycle) of partial solutions. Each partial solution except one from fields I never expected to be involved. Lots of work left to implement well, but this is the "easy" part.
Getting taxed on any increases in value early would feel very unfair. I have already put in so much value, for nothing in liquid/credible valuation yet, that things would have to go very well to compare equitably with what could sensibly have been expected if I had accrued half-time earnings, continuously saving and investing that income in its entirety, for over three decades.
Further worries: If I don't want to accept any venture capital, and at least for the foreseeable future bootstrap, would I somehow be forced into needing to liquidate ownership based on some accrued wealth rule anyway?
Hopefully not.
But if capital raises are the trigger for accrued wealth taxes, even a small raise after bootstrapped success gets ugly. Imagine raising capital after achieving bootstrapped success, by selling 1%, only to have to pay taxes on 99% of the company's new valuation! That would create a severe disincentive to take any capital ever, after bootstrapped success.
My suggestion: Only tax valuation gains on the sold shares. The realized valuation gain on capital raising shares passes (indirectly) to owners. The realized gains on any owners shares sold to cover those taxes would also pass (directly) to owners, as usual.
That would bring corporate capital raises into exact tax parity with normal owner stock sales.
The only difference is practical: The cash from an indirect sale (capital raise), goes to the owners indirectly (into the company), and is taxed indirectly (pass through). The cash from a direct sale (same sale percentage, but by each owner independently), goes directly to the owners, and taxes are assigned directly.
Either way, taxes are now identical.
(A third case, where all owners sell the same percentage of stock, and agree to all inject the funds into the company, might be a circuitous way to operate, but again, taxes are identical. Taxes on realized gains become sale path and cash purpose neutral.)
It’s a useful lagging indicator. Most here still think they have a shot at being the next unicorn like in the ZIRP era.
I'm on team "I wanna get rich" and also team "I want you to get rich". I'm also on team "I'm a programmer and not a CPA and definitely not your CPA". I pay a money person so I don't have to deal with this stuff because it's not interesting to me, but for those who do find it interesting, game on!
I will say though, that the most important thing someone ever pointed out to me was 100% of $0 is $0. Even just 65% of $really big number is still > $0
The conversations around taxation and gov finance in the USA are absolutely delulu. I'm in California. Not including sales and property taxes, high earners are paying over 50% in taxes. Whereas the overall expenditures are unsustainable and in many cases just not working anyway. Notable examples are that we are paying more in Interest than for military at the federal level, and we are burning cash on failed homeless policies without any hope of actual change. Any rational conversation has to cut spending.
> Notable examples are that we are paying more in Interest than for military at the federal level,
It is interesting to me that the party that runs on fiscal responsibility is the one that runs the highest deficits despite having a lower amount of GDP growth.
Looks like it's over 50% for regular income, but for long-term capital gains the top rate seems to be about 37%:
I do what I can to lower my tax bill, but in the end I take a philosophical attitude: if I'm paying more taxes, that's a sign I'm making more money.From a California perspective, there is no discount for capital gains. It is all taxed as income.
Yep. But they had to include federal to get above 50%, so that's clearly not the calculation they were doing. For federal + California, it does matter.
If I’m paying more taxes, it’s a sign the state is spending beyond its means
I don't see the connection.
100%, This is the uncomfortable fact of taxes in the US right now. If you are a high earning W2 worker, you are likely paying close to if not above 50% income tax rate. Pretty much on par with all the "high tax" European socialist countries you always hear people complaining about. There is basically no good way to lower this w2 tax burden.
I'm generally a "liberal" and support fair taxation and goverment spending, but the current level, based on the worldwide tax rates I've found, doesn't have much room to grow, especially when it does seem like goverment services are actually supbpar for many, and these taxes don't support some sort of universal health care/cheap university like they do in many European countries. I truly believe that goverment can and should be a force for good in people's lives, but I don't think that means we should give it a blank check. It does feel delulu that so many democrats seems to blindly support raising taxes on the "rich". I do think a wealth tax is very much the wrong approach.
It's pretty frustrating to when folks talk about taxing the rich, since it seems like the policies that get passed often just add even more burden onto the "working" rich vs the capital based rich. Even the long terms capital gains rate is close to 30+% in high tax states + top bracket, but there is way more room for deductions.
And revenue, right?
An alternative is graduated capital gains rates based on total assets owned (ideally skewed higher, like 10, 50, 100MM, …). Exemptions like QSBS could still be applied. This would allow shareholder control issues to remain unaffected, which wealth taxes never seem to address.
Not sure how to apply it on the corporate side. There are also multi entity workarounds to consider.
Just an idea.
I’ve always been of the opinion tax brackets should be “lifetime earnings” based regardless of income source.
Your first $1M should be taxed differently than your next $10M and so forth.
> Using comprehensive new data on U.S. venture capital deals, we find that founder returns remain extremely skewed, with 84% receiving zero exit value while the top 2% capture 80% of total value.
Where is this data from?
This theory seems to be BS, If let us say a founder is raising a seed round of 2m at 20m valuation, then according to hypothetical accrual tax rate, they would need to pay a tax of ~ 3-4m.
Quite funny that half of the team who wrote this hail from Switzerland, a country where there are no taxes on realized capital gains, much less unrealized ones.
Switzerland has a wealth tax. That is a tax on unrealized gains fyi.
Sure but tax on wealth is a tax on the integral of gains and trying to imagine a tax only on realized wealth seems like it would interest Switzerland but is difficult with real estate and stock markets.