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.

A Dutch security firm pushed code with full system privileges onto roughly three million computers belonging to strangers, then published every domain, file hash and host count it touched. This sentence could not have been written a decade ago, because for some it was a nightmare scenario. Today, however, Eye Security calls it their Operation IXIM. It ran from November 2025 to March 2026 with advice from the company’s lawyers. It is the clearest case I have seen so far of public discussion of active defense done to a standard. That standard, if I may say so myself, is the one David Willson and I put on stage repeatedly in 2012. For example, I posted the CONSEGI deck from Belém, Brazil in December 2012.

The United States this year generated a lot of bluster with a memorandum. On 12 August the White House issued Expanding Capabilities to Combat Transnational Cyber-Enabled Crime, directing a National Coordination Center to license vetted companies for “Cyber Surveillance Operations and Cyber Effects Operations” against foreign criminal groups, “exclusively conducted on behalf of and under the supervision of the Federal Government.” It’s almost too comical to read, but the core message was that the operating procedures were due within sixty days. The workflow and the targeting framework were set to be in a classified annex. Participants post a bond of at least one million dollars.

Well, here we are in November. The sixty days ran out on 11 October. The bombastic Trump program officially consists of the memorandum. Oh, and a fact sheet.

Going back in time, I had noticed right away that Orin Kerr five days after it appeared held the memorandum up against the Computer Fraud and Abuse Act. The statute exempts “lawfully authorized investigative, protective, or intelligence activity of a law enforcement agency.” Kerr weighed in to say that a voluntary program, in which a company proposes an operation and the government signs, would be the company’s activity rather than the agency’s. He concludes executive permission is useless against the elements of the statute, like if a police chief tells you it is fine to break into a house. Only a judicial warrant authorizes entry, from where he sits. The memorandum ends up looking like two signatures from co-directors and a classified annex that don’t add up to a hill of beans.

In the meantime, the reality of a Dutch operation landed.

Eye found a process named Updater.exe on a client laptop. It was calling an unregistered domain name. The program belonged to Time4Popcorn, a closed-source fork of the Popcorn Time streaming client, abandoned years ago. Eye registered the domain and received about fifty requests a second. The updater fetched an executable over plain HTTP, checked no signature, and ran it as SYSTEM on Windows and root on macOS. Whoever held the domain held every machine still running the updater, and Eye counted 3.8 million hardware IDs over six months. This was later revised to 2.5 to 3 million Windows hosts and 250,000 to 350,000 Macs after it found cloned disk images and changing hostnames inflating the count. Its IP sample included government, military and corporate networks.

Eye then served an update from the domain they controlled. The update stopped the updater service on Windows and unloaded the launch daemon on macOS. It collected no telemetry and deleted no files. Eye throttled delivery to one update per hardware ID. By December more than a million systems had been updated. By March request volume had fallen 98 percent. Eye then transferred its fifteen domains to the Shadowserver Foundation for sinkholing, published the flaw as CVE-2026-30612 in June, and presented the whole operation at hack.lu on 22 October with the domain list and file hashes attached.

Set that against our 2012 presentations on active defense theory and practice.

The CONSEGI slides framed active defense as four questions asked in order:

1. necessary: higher likelihood, higher severity, and existing blocks shown insufficient
2. effective: borrowed from John Snow’s cholera map and from Microsoft’s Project MARS: trace the attack, sinkhole the communications, tag the infections, shut down command and control
3. safe: proportionality, bystanders, escalation, reputation and lawsuit, each weighed as consequence against probability
4. legal: (slide 37) who has the job of defense, who defines what is reasonable, and when a higher authority declines the job, whether you are responsible to defend yourself and under which laws

Or to put it another way:

2012 gate	Operation IXIM
Necessary: current blocks insufficient	Abandoned updater, root privileges, plain HTTP, vendor gone
Effective: trace, sinkhole, shut down	Registered the domains, served the disabling update, handed the domains to Shadowserver
Safe: proportionality, bystanders	One action per host, no telemetry, no deletion, counts revised downward and published
Legal: who defines reasonable	Company counsel, with Ladybird cited as precedent

The last row is where IXIM diverges. Eye cites Operation Ladybird, in which Dutch police used seized Emotet servers in January 2021 to push an update that uninstalled the malware on 25 April. Ladybird ran on police authority inside a judicial operation. IXIM ran on a company’s legal advice.

Two private firms faced the same decision before Eye and went to a prosecutor. Avast found a flaw in the Retadup command protocol in 2019 and handed its disinfection method to the French Gendarmerie, which waited for prosecutor approval before 850,000 bots were made to self-destruct. Sekoia bought the abandoned PlugX command server for seven dollars in 2023, counted some 2.5 million infected hosts, had a working self-delete command, and published a request for courts and CERTs to ask for it. The Paris prosecutor supervised the cleanup and the FBI took nine warrants for the American machines. Eye had that option and chose its own counsel.

Eleven antivirus vendors flagged Eye’s payload as malware. Eye rewrote the code until one vendor still detected it, and wrote that it was “a little offended by the word malware.” It wasn’t the usual definition of malicious, after all. A SYSTEM-level payload tuned to pass antivirus, delivered to three million machines, with in-house counsel as its only authority. The Safe and Legal parts are self-attested. Eye published a world map of the hosts and no country split, so some share of the three million sits in the United States, where the statute Kerr describes still applies to a Dutch firm.

Our 2012 presentations would end with two requirements for the job: technical capabilities, and a legal framework with guidelines.

Eye brought the first and improvised the second. The memorandum in America would only get you the second, but we’re past its own deadline and have nothing visible to show for it. Kerr’s version of it is that it doesn’t matter anyway. He kind of reminds me of letters of marque being a major critique of active defense, because of attribution, proxies and liability. The White House published the worst bits of a marque structure, bonded contractors proposing their own targets from threat data they buy, and expects a classified annex to move the discussion?

Google’s XCPE action in late October is also worth a mention, but for the opposite reasons. Google used legal action against the domains and servers controlling 1.3 million backdoored Android TV boxes. The malware shipped on devices that passed Google’s certification tests, because Videostrong loaded it after first boot to evade them, and it stays on every box. Google’s head of disruption operations told The Record the severed domains were “effectively rendering the malware benign.” That is the warrant route Kerr likes, but look at the inversion of safety. The certification gap was Google’s own, and Google’s remedy stopped at the point where it would help the device owners. Eye’s clearly stepped in to defeat the harm.

Here is the past decade of publicly discussed attempts to remove or disable a threat on other people’s machines, with what authority.

Case	Authority
Wifatch, 2014 to 2015, tens of thousands of routers and cameras	Anonymous author. None.
Hajime, 2016 to 2017, IoT devices, left its own backdoor	Anonymous author. None.
BrickerBot, 2017, bricked IoT devices outright	Anonymous author. None.
Retadup, 2019, 850,000 Windows machines	French prosecutor and Gendarmerie C3N. Avast built the tool.
Ladybird (Emotet), 2021	Dutch and German police, Europol.
Hafnium web shells, 2021	US court order, FBI.
Cyclops Blink, 2022, WatchGuard devices	US court order, FBI.
Qakbot, 2023, 700,000 machines	US court order, FBI with European police.
Mozi kill switch, 2023	Unknown. Signed with the operators’ own key.
KV-botnet and Raptor Train, 2024, SOHO routers	US court orders, FBI.
PlugX, 2024 to 2025, ten countries plus 4,258 US machines	Paris prosecutor and C3N, then nine FBI warrants. Sekoia built the tool.
XCPE, 2026, 1.3 million Android boxes	Civil legal action by Google. Stopped at the servers.
IXIM, 2025 to 2026, about three million hosts	Eye Security’s own lawyers.
Trump memorandum program, 2026	DOJ and DHS co-directors, classified annex. No operation on record.

Ladybird had police behind it and XCPE used a court. But it was IXIM’s corporate lawyers who met the 2012 standard from necessity through disclosure. The program written by team Trump to put a federal signature on that kind of work has been completely outclassed by European innovators, which is no surprise to this old hand.

There’s a map of aircraft reports for Nov. 3 going around on social media right now because it shows satellite navigation degraded along nearly the whole of NATO’s eastern border.

From Kaliningrad through Lithuania, eastern Poland, Romania and Bulgaria to the western Black Sea, signals were affected. ItaMilRadar built it from AirNav Radar data and Defence Blog published it as if an imminent threat indicator. The map does, in fact, record where aircraft lost their accuracy. The jammer locations and direction, however, are not present. Nonetheless, this map generated claims that it was from Russia after they stood up a 1,500 km electronic wall on the border. The Midgard OSINT Review checked that claim against the data and reported a surge on a strike night. In other words, stray drones are the actual risk, while device details remain unknown.

The attribution fog of war is the actual story here, perhaps ironically for a jamming night.

Russian electronic warfare at Kaliningrad, St. Petersburg, Smolensk and Rostov jams to push swarms of Ukrainian drones off course. Flank states also run counter-drone jamming to bring down strays. An aircraft receiver in that region reports the same degraded signal either way, with no bearing to the source, so one map is everything at once. An aircraft sees a single problem, which means it shouldn’t attempt to point in either direction without additional work.

Defense right now adds to the fog as a side effect, which means the case stays open against an adversary who considers an open case to be a win.

When the poof is the proof, attribution costs suffer from inflation.