Keep in mind that not everyone pays taxes on capital gains. People with a lot of appreciated stock can simply borrow using the stock as collateral, and not pay a single penny in capital gains. Depending on the entity that owns the stock, the interest on the loan might even be deductible.
I hear a lot about that, but in reality it makes no sense. At some point in time the loan needs to be repaid and equity sold which carries a tax burden.
You could "step up" the basis when you die, but I find it hard to believe some billionaire would roll over debt for 30+ years, pay 200-300% in interest, just to avoid 20% long-term capital gains?
I read a lot of conjecture about how this happens and many people said Musk did this, yet he paid $500M in taxes last year?!?
> I find it hard to believe some billionaire would roll over debt
Plenty of rich individuals do exactly that, though. Hang out in any retirement/investing forum and you see people doing the cold hard math and deciding not to sell the stock and pay taxes if the step-up basis is enough.
You don't even need a significant return on capital for the strategy to pay off, it just has to slightly beat the interest on the loan over a very long time horizon. Consider these numbers: $100 million subject to capital gains, $10 million in cash needed for expenses, a 2% interest rate, a 2.5% return on investment, a 20% capital gains tax, and a 10 year timeframe.
The borrowing strategy starts with $100 million and a $10 million loan, and ends up with $128 million and a $12.2 million loan, so net $115.6 million (and the interest is likely tax deductible).
The taxpaying strategy starts with $88 million and ends up with $112.65 million.
