How rich people avoid paying capital gains tax on their wealth and investments when converting them to cash, and so can you.
Most rich people have their wealth from and invested in Real Estate, Stocks, Bonds, or any other capital assets. The income from such investments are taxed as a Capital Gain.
Capital Gains are the increase in value of an asset in comparison to your purchase price, and Capital gains are taxed at the moment it is a realized capital gain or, put simply, when the asset is sold.
As long as you hold the investment and don’t sell it, the increase in value will be an unrealized capital gain, hence a taxable event will not be triggered.
So you bought Stocks, and now they are worth millions of dollars, or your real estate appreciated in value, and you don’t want to sell them to now pay income tax, but you need cash to not be just rich on paper. What rich people do is they request a loan and they use their assets as a collateral or warranty. These loans are usually granted a low interest rest, and interest payments can also be deducted from income tax. A Win-Win situation.
There are, of course, other ways, strategies, and vehicles rich people use to not pay taxes or to reduce their tax bill, i.e. offshore company formation and trusts, personalized tax breaks, international tax planning, etc, as Capital Gain Tax is not the only that out there, but The Buy, Borrow, Die scheme is a simple and common tax strategy used by rich people to legally reduce their tax liability or prevent paying taxes.
The Contrast - Getting Paid in Salary
When an employee gets paid in salary and/or wages, the Employer withholds income and/or payroll tax from the employee at a 30% tax rate (the rate can vary from jurisdiction to jurisdiction, country to country, but we are using the 30% rate as an example only).
The taxable event is when you are paid your salary, so for a $100,000 salary, you will pay $30,000 in taxes.
How can anyone benefit from this?
Being rich does not mean you will not pay taxes if your are getting your income in the form of a salary, as you can be a rich CEO from a big company/bank earning million of dollars per year, but pay even a higher tax rate than those who earn less because salary and wages are usually taxed at a progressive tax.
It is just that the tax system seems to indirectly incentivize investments.
So even if you are not a millionaire, you could benefit from and impement this strategy as long as the tax you want to avoid is capital gain tax.
Important considerations:
This borrow borrow die strategy might not work in some countries, especially in those that are considered high risk countries as their bank loan rates are usually higher than capital gains tax rate.
Digital assets like cryptocurrency are not a common asset used for this strategy as most banks will not take crypto as a debt warranty due to its high volatility.
The information contained herein is written as general as possible and was written without regards or making reference to certain jurisdiction or country. This strategy might perfectly work for some jurisdictions, and not for others.
About the Author:
Jean Franco Fernández Clark
Corporate & Tax Lawyer.
Speaks English/Spanish/French/Italian/Russian. 我学习汉语。
Disclaimer: the information contained herein is for information purposes only and nothing herein shall be considered financial, tax, or legal advice.