Proposal for the BROTAX Act

Purpose

To treat borrowing against appreciated assets by the wealthiest taxpayers as a realization of gain, to end the stepped-up basis at death for those taxpayers, and to require lenders to report securities-backed credit.

Findings

1. The Internal Revenue Code taxes capital gain only when an asset is sold.
2. Taxpayers holding concentrated positions in appreciated stock obtain cash by pledging that stock as collateral for loans. Loan proceeds are excluded from income.
3. These loans are commonly carried until death, when section 1014 resets the basis of the collateral to fair market value and the gain that secured the loan is never taxed.
4. The 25 wealthiest Americans paid federal income tax equal to 3.4 percent of their wealth growth between 2014 and 2018, according to IRS records obtained by ProPublica. One of them paid no federal income tax in 2018 while pledging tens of billions of dollars in shares as loan collateral.
5. Section 1259 already treats a hedge that locks in gain on an appreciated position as a sale. Borrowing against the same position converts gain into spendable cash and merits the same treatment.
6. The combined effect of these provisions makes capital gains tax elective for the wealthiest taxpayers.
7. Closing the borrowing loophole for households above $100 million in net assets would raise more than $100 billion over ten years, according to Fox and Liscow, 182 Tax Notes Federal 647 (2024).

Section 1. Covered Taxpayers

This Act applies to any individual whose net worth exceeds $100 million on the last day of the taxable year. Net worth includes assets held through grantor trusts, non-grantor trusts the individual funded, partnerships and corporations in which the individual holds a controlling interest, private foundations under the individual’s control, and the assets of a spouse.

Section 2. Covered Loans

A covered loan is any transaction in which a covered taxpayer receives cash or cash-equivalent value and retains economic exposure to an appreciated asset that secures or is economically linked to the transaction. Covered loans include securities-backed lines of credit, margin loans, prepaid variable forward contracts, equity swaps, repurchase agreements, and loans from related parties or foreign lenders. The Secretary shall apply this definition according to the economic substance of the transaction.

Section 3. Realization on Borrowing

(a) Proceeds of covered loans drawn during a taxable year, in excess of $1 million, are treated as an amount realized from the sale of the pledged assets on the date drawn.

(b) The gain recognized equals the lesser of the proceeds drawn and the built-in gain in the pledged assets. Gain is taxed under section 1(h).

(c) The basis of the pledged assets increases by the amount of gain recognized. Where multiple assets secure the loan, basis is allocated in proportion to built-in gain.

(d) Repayment of a covered loan produces no deduction and no reduction of basis.

(e) Interest on covered loans is excluded from the deduction under section 163(d).

Section 4. Carryover Basis at Death

Section 1014 shall not apply to property acquired from a decedent who was a covered taxpayer. Such property takes the basis it held in the hands of the decedent. Chapter 11 estate tax continues to apply.

Section 5. Reporting

(a) Any lender extending a facility secured by securities with a balance or commitment above $1 million to a covered taxpayer shall file an annual return with the Secretary showing draws, repayments, outstanding balance, and collateral.

(b) A covered taxpayer who borrows from a lender that files no return loses the exemption under section 3(a) for that loan.

(c) Trusts, partnerships, and corporations attributed to a covered taxpayer under section 1 report their covered loans to the individual.

Section 6. Transition

Covered loans outstanding on the effective date are treated as drawn in five equal annual installments beginning in the first taxable year after enactment. Any renewal, extension, increase, or refinancing of an outstanding facility is treated as a draw of the full balance on that date.

Section 7. Constitutional Basis

The tax under this Act attaches to a transaction in which the taxpayer received money. The taxpayer elected to convert appreciation into cash. Congress has the power under the 16th Amendment to tax income from whatever source derived. In Moore v. United States (2024) the Supreme Court upheld a tax on income realized by an entity and attributed to the taxpayer who held the economic interest. Section 1259 has operated on the same principle since 1997.

Section 8. Effect

A founder who wishes to retain control of a company retains it. A founder who wishes to spend the appreciation pays the tax a seller pays. In 2020 the chief executive of Tesla pledged $57.7 billion in shares as collateral for personal loans. Under this Act, each dollar drawn against those shares is taxed in the year of the draw.

Section 9. Revenue

The Joint Committee on Taxation shall score this Act before floor consideration.