Pretending a loan is income and in turn taxing it as such, just because the ‘wrong thing’ was used as collateral, is nonsensically-arbitrary, I think.
Why not make a law against using unrealized capital gains as loan collateral? Or just force ‘realization’ of the capital at loan time, and they can pay the taxes on that. A home equity loan is against real property, so it wouldn’t be subject to the same issue.
Why not make a law against using unrealized capital gains as loan collateral?
Because that would outlaw home equity loans, for one thing. Anything you own that’s increased in value since you started owning it is “unrealized capital gains” by definition, until/unless you sell it, not just stocks.
The fact is, taking a loan out using stuff you own as collateral, regardless of what it is, is a perfectly normal thing to do that in itself deprives no one of anything. Lenders aren’t in the business of throwing money out the window—they make these loans because they get repaid, and then some. Someone who takes out a home equity loan and uses the money to renovate their house so that it’ll sell for an increased price beyond the loan amount + the interest rate, is making the exact same ‘move’ as someone who takes a loan out using their stock in a company as collateral, and uses that money to do things that make that stock increase in value beyond the loan amount + the interest rate.
Why not make a law against using unrealized capital gains as loan collateral? Or just force ‘realization’ of the capital at loan time, and they can pay the taxes on that. A home equity loan is against real property, so it wouldn’t be subject to the same issue.
Because that would outlaw home equity loans, for one thing. Anything you own that’s increased in value since you started owning it is “unrealized capital gains” by definition, until/unless you sell it, not just stocks.
The fact is, taking a loan out using stuff you own as collateral, regardless of what it is, is a perfectly normal thing to do that in itself deprives no one of anything. Lenders aren’t in the business of throwing money out the window—they make these loans because they get repaid, and then some. Someone who takes out a home equity loan and uses the money to renovate their house so that it’ll sell for an increased price beyond the loan amount + the interest rate, is making the exact same ‘move’ as someone who takes a loan out using their stock in a company as collateral, and uses that money to do things that make that stock increase in value beyond the loan amount + the interest rate.