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I don't get this tax evasion scheme. Can someone explain it? I'm from Toronto, Canada. I don't know if the author had in mind US taxes.

Jargo comments on Deutsche Bank and Wall Street banks reportedly just gave Congress thousands of documents related to Russians with possible ties to Trump

The smart tax evaders do it the slimy smart way. Get paid from work in (1.) equity, use said equity as (2.) collateral to take out a loan for an identical amount, then (3.) never worry about paying it out because your collateral is equal. (4.) You don't have to pay income tax on the loan, they don't pay it on collateral, everyone wins except the government and the common folk. I guess I should say everyone loses except the two parties.

  1. What does "equity" mean here? The quote beneath says "Also get paid in stocks." Thus I don't think "equity" means stocks here...why wrote "Also" if it did mean "stock"?

  2. Does "collateral" mean buying stock on margin?

  3. Why "never worry about paying it out because your collateral is equal"? What if your stock price drops, and broker margin-calls you?

  4. The tax evader wants capital gain, thus don't they have to pay capital gains tax?

notcrappyofexplainer comments on Deutsche Bank and Wall Street banks reportedly just gave Congress thousands of documents related to Russians with possible ties to Trump

Get paid from work in equity,

Also get paid in stocks. The tax rates are way less then earned income..and they are talking about lowering it.

stannius
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1 Answers1

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Essentially you have two people pretending to understand something and writing enough that it feels like it makes sense. The whole idea falls apart when you realize that equity grants are taxable. Get paid $100,000 in stock, you owe income tax on $100,000 of income even though you didn't actually receive $100,000. People do this because they think the stock may be worth $100,000,000 in some number of years. Sometimes they'll take a loan also to have some spending money, but either way, they declare $100,000 of income and pay the appropriate amount of taxes.

What a number of CEOs are somewhat known for doing is putting up their stock against a loan because the stock has appreciated A LOT and they'd rather not sell it right now. There was a time that Amazon stock was only worth a few dollars. Do you have $100,000,000 of stock but you don't want to sell any because the sale would incur a capital gain tax and reduce your voting rights and you think the stock is still going up? One solution is you take out a loan for $1,000,000 putting your stock up as collateral. You get your $1,000,000 of liquidity, you'll owe interest on the loan, and you'll have to pay it back with taxed income.

If you get paid $1,000 in cash you received $1,000 in income. The person who wrote that answer thinks simply agreeing to accept a box of Yugioh cards and a $1,000 loan means you didn't actually get paid; they're wrong. The follow-on uninformed person also seems to think equity and stocks are different things, they're not.

Admittedly, deferred compensation is complicated, too complicated to explain in an answer here. But, rest assured, $1,000 of cash and $1,000 of stock and $1,000 of bottle caps are all $1,000 of income as far as tax authorities are concerned; even if you're a blood sucking billionaire.

quid
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    I might emphasize the "equity grants are taxable" in bold face. That's really the core of the answer. – chepner Aug 10 '19 at 15:00
  • Can you address the claim that one could accept $100,000 in stock, pay taxes on that, then have it appreciate to $1,000,000, take a loan out on that, and then simply not pay back the loan? Suppose the lender was in on this, would they be the one stuck paying the tax on the collateral at some point? –  Aug 10 '19 at 16:35
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    @Michael You don't default on the loan, it's just open-ended as long as you keep paying the interest (or meeting whatever other terms there are). Presumably the bill would come due if you die, the collateral drops in value, or other conditions are met, at which point you or your estate would have to pay the taxes. – chrylis -cautiouslyoptimistic- Aug 10 '19 at 17:54
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    @Michael, taking out the loan is a way of deferring taxes. If you're lucky, you can defer the taxes for so long that they no longer matter to you. If you're not lucky, the stock falls in value and you go bankrupt. – Mark Aug 10 '19 at 19:28
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    @Mark What if the stock grant is in a privately traded company - how is valuation determined then? –  Aug 10 '19 at 20:45
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    @Michael the only difference between public and private equity is a lenders appetite to accept the stock as sufficient collateral for the loan. Private company stock can be very illiquid so lenders are less likely to care about your equity regardless of how the value was derived. The assertion in the question that someone would "never pay back the loan" is inane. The loan gets paid eventually, with income that is taxed, and lenders in this area will TYPICALLY also require life insurance depending on the dollars involved. – quid Aug 11 '19 at 01:23