The very wealthy take out loans backed by their stocks so they don’t technically have income.
But wouldn’t they be taxed when they sell stocks to repay the loans?
In: Economics
Picture stocks as toys in your toy box, they’re varied and you got them from all sorts of different places, but they’re all valuable. Now let’s say you want some money (maybe to buy more toys, maybe not), but you don’t want to have to give the government any money from taxes. What you might do is visit a bank and ask to borrow some money and instead of actually selling the valuable toys in your toy box, you just promise to pay the bank back using those toys as collateral (which means if you can’t pay back the loan you promise to give them that toy). The bank agrees to this because they can charge interest on the loan or because they believe they can sell these toys for even more money later if they get their hands on it (or maybe just because it looks good for them to have clients with lots of toys).
So you use that loan to buy more things you want, but since you didn’t *sell* those toys, you don’t have to pay any income/capital gains tax for selling them. Now when it comes time to pay back that loan, there are all sorts of things you can do. For example, if some of your other toys/investments have grown in value, you can use those to pay the loan, maybe even get a new loan to pay for the first. People with lots of toys keep this up for a long time, all without selling those original toys.
Eventually, however, they will need to sell some stocks (toys) to repay those loans, and yes they will need to pay tax on these sales. But their goal is to use loan money as much as possible (buying and selling etc) in that time so that as little money as possible ends up going to the government. In the end, by taking loans backed by stocks, they live off the loan money, taking advantage of this wealth without having to see taxes on each their bills.
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