So he takes out a $1 billion loan, and he offers $1 billion in stock as a security, and then also buys a futures contract (or a put option) on his $1 billion of stock to lock in the current price, so if the stock goes down in value over the life of the loan, the lender doesn't lose their security? And then when the loan falls due, he refinances – get a new loan using the same mechanism, and use it to repay the existing one? And he doesn't owe capital gains tax on the stock he uses as security, because he doesn't actually sell it?
I suppose though, you can't just go on refinancing forever. One day he will die, and then it will have to come out of his estate, and I guess his estate may pay the capital gains tax then? So it is really delaying paying tax, rather than getting out of it forever?
Unless, I suppose, he leaves the stock to a trust in his will, and transfers the loan to the trust too, and then the trust can continue this process long after he is gone? And maybe, if it is a charitable trust, even use some charitable tax exemption to get out of paying the tax permanently?
All this adds up to zero capital gains taxes being paid ever on the entire amount.
If it's hedged you actually don't have any upside so you will always be 'underwater' on the loan assuming >0 interest rate.
If interest rates were higher, it probably wouldn't make sense to do this endless loan trick[1]. Say you get charged 5% on this loan or you could pay 30% cap gains. It would only take 5 years for the interest payments to outstrip the upfront hit on the tax.
1. This is very simplistic though, as likely the $1bn would be invested in some way that would kick off some return, probably enough to cover the interest.
This is the best part. The cost basis for assets is stepped up on death to the price of the asset on the day that the decedent .. became the decedent. That becomes the cost basis for any capital gains tax the heir would owe if they sold the asset.
