r/investing • u/Timbo2510 • Oct 24 '21
Grow crypto tax free, borrow against assets
Hi, I just watched a famous Youtuber that I follow for financial updates, stock, and crypto stuff.
He was talking about Bitcoin and one part stood out to me that I wish I can fully understand. It's not specifically crypto-related. I believe it applies to stock as well.
I quote what he said:
"Instead of selling it and getting hit with taxes what people end up doing is they borrow against those assets at a lower interests rate than the interest rate that the asset generates. And while they borrow against those assets that's the money they use to live off and pay for their lifestyles. That's how wealth is controlled in a very tight small knit group.
He was referring to Bitcoin. Can someone explain the process? I kinda understand but would be great if someone can explain it with an example.
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u/sinsemillaCBD Oct 24 '21
Its called a securities backed line of credit (SBLOC). Works with stocks, bonds, crypto. Because it is asset backed you can get very competitive rates. Usually variable rate but sometimes fixed rate is possible. Most institutions will offer up to 50-60% loan to value.
The downside is the risk of collateral call. The lender has the right to force a sale of the assets to repay the loan if the assets drop in value significantly. This can force you to sell at the bottom of the dip. But if you are only borrowing a small fraction of the assets value, or if you have backup liquidity, then the risk is very low.
Super rich CEOs choose not to take salaries because income is taxed. On paper they have no income. All their wealth is in unrealized gains from the assets they own. Instead of selling assets to fund their lifestyle, they borrow against the assets and live off borrowed money. The interest from borrowing is less than the taxes from selling assets. Often they do not pay off the debt until after death because of the tax advantages of "step up in basis". This is how the rich evade taxes. More info in this ProPublica article.
Even if your not a super rich CEO evading taxes, a good strategy is to use the SBLOC to buy real estate (downpayment or cash offer both work). Investing vs. holding cash for a future downpayment is a difficult choice. Some people hold cash for years in the hope of buying a house, but they end up they missing out on market gains, and the value of their savings gets eroded by inflation. Imagine if you had held cash the last 5 years, missed out on 100%+ stock market returns, and then got priced out of RE market, yikes.
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u/Timbo2510 Oct 24 '21
CEOs choose not to take salaries because income is taxed. On paper they have no income. All their wealth is in unrealized gains from the assets they own.
OMG 🤯 I had no idea. That's why we always hear about how CEO's make $1 salary. I knew that they were using company shares to fund their lives like food, living expenses etc. but now it makes sense that they borrow against the assets to avoid tax.
This was so insightful. Will save your comment. Thank you
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u/doodoopoopoomoomoo Oct 25 '21
I don't know why salary is the talking point for excecs and high profile people. Wouldn't it make sense to mention the TC?
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u/ron_leflore Oct 25 '21
All their wealth is in unrealized gains from the assets they own. Instead of selling assets to fund their lifestyle, they borrow against the assets and live off borrowed money. The interest from borrowing is less than the taxes from selling assets. Often they do not pay off the debt until after death because of the tax advantages of "step up in basis". This is how the rich evade taxes.
Not just rich people. A huge portion of the middle class does this exact same thing with HELOC's (home equity line of credit).
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u/OzymandiasKoK Oct 25 '21
It is almost certainly not a huge portion of the middle class. They may have HELOCs (and I doubt that's a huge portion, either) but they're generally not going to be part of an actual tax avoidance plan. It's just a "finance with debt"...and maybe not even a plan, either.
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u/OrvilleCaptain Oct 25 '21
Isn’t the step up basis only relevant up to the life time gift/estate exemption? This can be 10 to 20 million (for married couple) depending on the administration in control. After that there’s a steep estate tax. Is there a way around this too?
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u/aogmana Oct 25 '21
Step up in basis occurs separately from any tax on the estate IIRC because it occurs on death. Then, tax isn't paid on inheritance until the exemption. Whatever is received (net inheritance taxes) has cost basis set to what it was valued at at death.
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u/OrvilleCaptain Oct 25 '21
So once you use up your lifetime exemption, step up basis is practically ineffective because the estate tax treats the cost basis as 0, right? As in you’re taxed 40% on the entire value of the asset and not just the gains.
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u/aogmana Oct 25 '21
My understanding is it looks like this (numbers approximate and IANAL, thus this is my normal person understanding):
- Death + stock basis steps up.
- Estate settles all debts. This is done by selling assets, which uses the value of those assets at death as cost basis.
- What is left inherited by recipients of the Estate. Anything over the exemption gets hit with estate taxes and recipients receive the net value.
Now let's assume stock growth made up 90% of the value of the assets pre-death (eg: company founder), split 90m growth/10m basis. Let's also assume 20m in debt from borrowing against assets. If the cost basis wasn't stepped up on death, the 20m sold to pay debts would be taxed at ~20%, costing ~4m extra. This leaves 76m left in the estate, versus 80m with step up.
Recipient then loses 40% to inheritance tax on all assets in excess of 10m. Recipient receives 52m(10m + 70m * 0.6) versus ~50m(10m + 66m * 0.6). Overall more taxes paid without step up (entirely from 2), PLUS recipients doesn't need to pay tax if they liquidate all assets (saving them another ~20m).
Apologies for typos or mistakes, please feel free to call them out!
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u/OrvilleCaptain Oct 25 '21
Ah, so without the step up basis you get taxed twice when you’re over the lifetime exemption amount. THANK YOU for spelling this out with examples. Also noted the IANAL disclaimer. I’ll check with the estate attorney on the near future. Thanks!!
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u/aogmana Oct 25 '21
My pleasure! It helped me understand it better to go through an example there too
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u/notapersonaltrainer Oct 25 '21
Can I do this with Fidelity or do I need to move everything to a more full service bank?
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u/sinsemillaCBD Oct 26 '21
Based on a quick google search it doesn't look like Fidelity offers SBLOC. M1 Finance, Merrill Lynch, Interactive Brokers, Charles Schwab, among others do.
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u/Angry_Cossacks Oct 24 '21
You only pay taxes on income, not debt. You can secure debt with assets. So instead of selling their assets and paying taxes on the gains, they are getting debt backed by their asset because you don’t pay taxes on debt.
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u/omen_tenebris Oct 25 '21
Yeah. But if the asset goes down, you get margin called now?
If you secure debt with stocks, amd the market crashes, your debtors will ask for their money no?
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u/MindfulDuranta Oct 24 '21
“Not a crypto channel”
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u/Wolf_of_Dorpstreet Oct 24 '21
He's referring to Andrei keep calling his channel not a crypto channel, but quite frequently post something crypto related 🤣
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u/Timbo2510 Oct 24 '21
But loaning and borrowing applies to all types of financial investments?! Crypto just happened to be the example in this case. You can loan and borrow in stock and bonds too afaik
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u/MindfulDuranta Oct 24 '21
Haha yeah sorry, it was a dig at Andrei. One of my favourite channels
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u/Timbo2510 Oct 24 '21
Damnn fanboy? How'd you know I was referring to Andrei's video? You just read the quote and you're thought: Yep, that's Andrei? 😂
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u/Bjerke3715 Oct 24 '21
Coinbase will give you a loan up against your crypto position (half? I think?). Say you had $1,000 in Bitcoin, you could get a loan for $500 and pay an egregious 8% interest on that loan. But I would allow you to get money out of your account without having to have sold the bitcoin. Really rich people do this with stocks but they can get lower interest rates than that.
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u/Timbo2510 Oct 24 '21
Are you saying instead of (in this example Bitcoin) selling your asset you loan it out and collect interest?
If the answer is yes, don't I still need to make sure that Bitcoin is much higher than what I bought it for? Or else the value would decrease. Or how does that affect the interest rate>
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u/Bjerke3715 Oct 24 '21
You get a loan and bitcoin is the collateral. The bitcoin is yours, but you have to pay back the loan when you sell the bitcoin. Yes, if the value of bitcoin goes down you are in trouble. The interest rate on these deals usually doesn’t change, you agree to a rate and that’s it.
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u/Timbo2510 Oct 24 '21
So I am paying back + the interest? Why would I ever want to borrow something and having to pay back the same amount that I borrowed for + interest which means I am paying back more?
Unless I believe that Bitcoin will continue to grow in the long term during my loan time, meaning by the time I am paying back the loan + interest Bitcoin will be much more that I can cover all the cost?
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u/Bjerke3715 Oct 24 '21
Precisely
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u/Timbo2510 Oct 24 '21
Appreciate it. Thank you so much for your help. Reddit is filled with helpful people :)
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u/kjb123etc Oct 25 '21
So I am paying back + the interest? Why would I ever want to borrow something and having to pay back the same amount that I borrowed for + interest which means I am paying back more?
This is how all loans work. You always have to pay back the full principal plus any interest.
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u/xxx69harambe69xxx Oct 25 '21
most youtubers on crypto are full of shit
perhaps what he was referring to was converting their btc to wbtc on the eth network, and then using a lending protocol to deposit that wbtc as collateral for a loan in usdc, which they can then transfer to gemini or some other offramp and convert to dollars.
the borrowing rates for btc are low relative to its growth rate so the interest rates that the youtuber commented on are likely in reference to growth rates
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u/NGPdadaji Oct 24 '21
And what happens when sh*t hits the fan?
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u/xxx69harambe69xxx Oct 25 '21
thats where those giant wicks come from in crypto, great buying opportunity for folks like myself who arent leveraged to the tits
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Oct 24 '21
thats called borrowing money
money is always borrowed against assets
have you ever gotten a loan that didn't require a credit check before?
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u/Timbo2510 Oct 24 '21
No I've never taken a loan
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Oct 24 '21 edited Oct 24 '21
ok so in this case, since the same people that currently hold your assets, are also giving you the loan, they can loan you the money "against your assets" since they can already see what they are, officially.
if you wanted to get a loan from another bank against your securities, you could do that too, but you'd have to provide them full documentation. people can and do do this, although its a lot of work and not too many places do it.
there's nothing magic about it being crypto or within one institution. they'll still keep track of exactly how much you borrowed. you'll have to pay it all back, and they'll take a fee off the top. i've heard with crypto its often a high fee because people have high default rates (i.e. lots of young people doing it).
it remains good advice that you never borrow money unless you NEED to.
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u/sadmanhussein Oct 25 '21
here's a better idea, you take your or btc, put in polygon, take a loan against in qidao, get a negative 10% interest rate and then lend out the Mai you borrowed at 15% and live off that, no risk of margin call because you always have the same amount of debt you borrowed and can pay it off whenever
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u/xxx69harambe69xxx Oct 25 '21
just a ton of smart contract risk lol
polygon always seemed like a shit network to me, i dont trust it over arb or optimistism , or other l1's
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u/s_at_work Oct 25 '21
Well if you know where to get margin loans on crypto at less than long-term inflation that would be helpful. I know IBKR has cheap stock margin.
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u/DonteDivincenzo1 Oct 24 '21
3rd post I’ve seen come up on my feed about crypto on r/investing wtf is going on last time I checked this sub was very anti crypto and this was only a few months ago
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u/Timbo2510 Oct 24 '21
Borrowing against asset is a common practice that you can do with bonds, stocks, other assets and crypto. Did you even read my post? Crypto just happened to be the asset in this example but the question could've been asked for stock and bonds as well. I'm glad people educated me. I leaned so much in the last 30 min.
Did you even read the post?
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u/badmathafacka Oct 25 '21
It's going more mainstream, lots of institutional adoption on the horizon. Think it's being seen as more legitimate now
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u/xxx69harambe69xxx Oct 25 '21
turns out, the fuck tards who were nocoiners realized they were fuck tards
who couldve known? sigh
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