Can it really make sense from a tax point of view just to accumulate debt against your stock rather than to, say, sell a bunch of stock, buy tax free bonds, and live off the interest? A question for Mark Zuckerberg.
Yes, I'm pretty excited about the Facebook IPO, at least as a news event. Whether I will plough through the S-1 is doubtful, but it's more interesting than the death of the EZ and the usual fare on CNBC.
If he sells, he'd have to pay capital-gains tax (15% federal) before he could get into the tax-exempt bonds. Borrowing is tax free.
Posted by: Eric Chason | February 03, 2012 at 03:42 AM
True, but if he borrowed a substantial amount he'd have to borrow on margin. If the stock price drops and there is a margin call, he'd lose the stock and get stuck with the tax bill for selling the stock. Also, a margin call is unlikely to come when the price is high so there are potentially catastrophic losses.
Finally, there are anti-abuse provisions to prevent people from borrowing money to fund tax exempt bonds, but as long as he doesn't claim the interest he's probably safe.
The moral of the story is that it is possible to live a tax efficient life, but the goal of enforcement is to make it inconvenient enough that most reasonable people will just pay the damn tax.
Posted by: molly | February 03, 2012 at 07:12 AM
I bet MZ can borrow at LIBOR secured only by his general awesomeness.
Posted by: Eric Chason | February 05, 2012 at 04:25 AM