Full Proposal Document
Ending the "Buy, Borrow, Die" Loophole
A Targeted and Constitutional Tax Reform
Our tax system requires most Americans to pay taxes on their income with each paycheck. Yet the same system allows those with significant assets to access their wealth through loans against appreciated stock—without triggering capital gains tax.[10] This strategy can defer or even eliminate tax obligations that would apply to everyone else.
We propose a common-sense, constitutionally sound reform to address this disparity—one that taxes stock wealth only when it's spent like income, not when it's invested.
Who Would Be Affected?
This proposal is narrowly targeted and would only affect individuals who meet all of the following criteria:
- Take out loans over $10 million secured by publicly traded stock
- Use those loans for personal consumption rather than productive investments
- Use this borrowing strategy specifically to avoid paying income or capital gains tax
For the vast majority of Americans:
This proposal will have no impact on your taxes. It doesn't raise capital gains tax rates for anyone, create new taxes on unrealized gains, or affect ordinary investment strategies. It only addresses a specific tax avoidance strategy used primarily by ultra-high-net-worth individuals with hundreds of millions or billions in assets.
Summary of the Proposal
Addresses a structural feature in the tax code that allows borrowing against stock to access wealth without paying tax on gains, even when funding personal consumption.
Treats large personal-use loans as constructive sales of stock, triggering capital gains tax while preserving credits to avoid double taxation.
Preserves investment incentives by exempting business and investment-related borrowing.
Upholds the Constitution using established doctrines like constructive realization, economic substance, and substance-over-form.
Prevents permanent tax avoidance by eliminating the step-up in basis for stock used in these loan transactions.
Includes anti-abuse protections against shell companies, trust manipulation, and offshore evasion.
Updated Policy Proposal
1. Deemed Sale of Stock-Backed Loans for Personal Use
- Loans over $10 million, secured by publicly traded stock, and used for personal consumption (luxury items, homes, or controlled private businesses), will be treated as constructive sales.
- This triggers capital gains tax based on market value at the time of borrowing.
2. Tax Credits to Prevent Double Taxation
- If the loan is later repaid by selling stock, taxpayers receive a credit for tax already paid.
3. Reporting and Compliance Requirements
- Stock-backed loans over $1 million must be reported to the IRS.
- Borrowers must declare intended use and submit line-item breakdowns of how funds are spent.
- Tax applies only to non-exempt uses (personal consumption or control-based acquisitions).
4. Step-Up in Basis Denial
- Step-up in basis is denied on stock used in loans taxed under this proposal.
- Original basis is retained by heirs, ensuring gains aren't permanently untaxed.
5. Refinancing Rules
- Tax-free refinancing is allowed only if:
- The original loan was non-taxable.
- The refinance repays principal and interest only.
- No new cash is withdrawn.
- Only one refinance per 5 years; must repay in 15 years.
6. Anti-Avoidance Measures
- Tax applies even if personal use is disguised through trusts, shell companies, related parties, or offshore structures.
- The IRS may recharacterize transactions to preserve economic substance.
Legal Foundation
The proposal draws on established doctrines:
Substance-over-form (Gregory v. Helvering):[1]
Tax law focuses on economic reality over legal structure.
Constructive receipt:[2]
Income is taxable when made available, even if not taken.
Economic substance:[3]
Transactions must serve a business purpose beyond tax avoidance.
These doctrines empower Congress and the IRS to treat these loans as realizations without violating the 16th Amendment. Recent decisions, such as Moore v. United States (2024), support broader interpretations of income when wealth is accessed.
Real-World Example: Elon Musk's Twitter Purchase
Under Current Law:
- ✖
No capital gains tax is triggered on the $13 billion loan.
- ✖
If Musk dies before repaying the loan, his heirs inherit the stock at a stepped-up basis and owe zero tax on the appreciation.
Under This Proposal:
- ✓
The IRS would treat the $13 billion loan as a constructive sale of Tesla stock.[11]
- ✓
Musk would owe approximately $2.96 billion in capital gains tax (at 23.8%).
- ✓
If he later repaid the loan with actual stock sales, he'd receive a full tax credit.
- ✓
If he died with the loan still open, his heirs would retain the original cost basis (not stepped-up) on that stock.
This ensures stock used as cash is taxed like cash—while investors who reinvest remain untaxed.
Why This Matters
This reform doesn't raise rates. It simply ensures consistent tax treatment when stock wealth is used for personal consumption, similar to how income is taxed for most Americans. It preserves investment incentives while addressing tax-free consumption and intergenerational tax avoidance.
Anti-Avoidance Provisions
To ensure effectiveness and prevent exploitation:
1. Personal Use Masked as Business Use
Requires documentation and majority-use test.
2. Shell Companies & Trusts
Tax applies if the borrower retains beneficial use.
3. "Passive" Investments with Control
Minority stakes with operational control are taxed.
4. Related-Party Intermediaries
Transfers to family or controlled trusts are included.
5. Charitable Loopholes
Controlled nonprofits or foundations do not exempt the use.
6. Offshore Structuring
U.S. citizens taxed on global activity.
7. General Anti-Abuse Clause
The IRS may recharacterize any transaction designed to evade the tax.
Current Law vs. Proposed Reform
| Step | Current Law | Proposal |
|---|---|---|
| Borrow against stock | No tax | Deemed sale triggers capital gains tax |
| Die with open loan | Heirs get step-up in basis | No step-up for loaned stock |
| Tax ever paid? | Potentially never | Always paid once if used for consumption |
This table illustrates how the reform ensures taxation occurs only when wealth is accessed and used as income, not while it remains invested.
Summary
This proposal is grounded in well-established tax principles, clearly distinguishes between investment and consumption, and includes safeguards to prevent abuse. It offers a practical, targeted way to ensure consistent tax treatment when wealth is used like income.