The topic of Capital Gains can be contentious, with many calling for various schemes to tax the wealthy including unrealized capital gains. However, a long discussed debate in economic, legal, and political circles is whether or not Capital Gains amounts to DOUBLE taxation. The argument that it amounts to double taxation is that the income when it is earned is taxed, and then taxed again when the proceeds from that income appreciate through investment and are sold. Essentially taxing the same income twice – once when it was earned through labor, and again from the appreciation from the asset purchased with the labor. Others defend it as a legitimate method of taxing new income derived from capital, which should be treated similarly to income from labor.
In this debate there is no right or wrong way, just different approaches for collecting Government tax revenue. This article analyzes the question of if Capital Gains is Double taxation, examines the structure, arguments, and implications of capital gains taxation. It unpacks both sides of the double taxation debate, analyzing the effects of inflation and asset illiquidity, explores international comparisons, and capital gains’ composition in Federal revenue.
II. What Are Capital Gains?
Capital gains are the profits earned from the sale of an asset—such as stocks, bonds, real estate, or a business—when the sale price exceeds the original purchase price. Those gains are then categorized by the amount of time they are held before sale to determine their tax treatment as follows:
Short-term (held <1 year): these are taxed at ordinary income rates (10%–37%).
Long-term (held ≥1 year): these are taxed at preferential rates (0%, 15%, or 20%) depending on the taxpayer’s income level.
Additionally, a 3.8% net investment income tax (NIIT) may apply for high earners, pushing the top effective rate to 23.8% federally [1]. Unlike labor income, capital gains are taxed only when realized (i.e., the asset is sold).
III. The Case That Capital Gains Taxation Is Double Taxation
A. Taxed Once on Earned Income
The money used to invest typically originates from wages, salary, or business income—already subject to income tax. For example, a worker earns $100,000, pays $25,000 in taxes, and invests a portion of the remaining amount. If that investment later grows, the appreciation is taxed again.
Critics argue this represents sequential taxation on the same income stream: first on the principal earned from income, then on its growth when an asset is sold, all of which is derived from the same initial income.
B. Taxed Again on Gains and Inflation
Capital gains taxes apply to nominal gains, not real (inflation-adjusted) gains. Meaning, unlike with labor where you get paid in regular near term increments, like weekly or bi weekly, gains can happen over much longer periods in years and sometimes decades where you do not have the same access to the capital as you would with normal income and it is exposed to inflationary effects over that time period. So, if someone gave you $10 in 1950, and $10 in 2025, which would be worth more? Inflation adjusted the $10 bill in 1950 would be worth over $130 dollars adjusted for inflation today. So, critics argue that not only are you taxed on the original income again, you are also taxed on the inflation.
Example: A property purchased in 1990 for $200,000 and sold in 2025 for $600,000 shows a $400,000 gain. However, if cumulative inflation was 140% over that period, the real gain is much lower ($400,000 gross gain – inflation $280,000 = $120,000 post inflation gain). However, tax is still levied on the full $400,000.
This results in effective tax rates on real gains far above the statutory capital gains rate. Meaning that adjusted for inflation, the tax rate is much higher than the 15 or 20% normally associated with long term Capital gains. In the example we looked at the capital gains of $400,000 at 20% capital gains rate would result in a tax liability of $80,000. If you applied it to the post inflation gain of $120,000 and used the tax liability of $80,000 that would be an effective tax rate of over 66%, well above the 20% Capital Gains rate.
C. Accessibility and Deferral
While labor income is paid regularly and can be spent immediately, capital gains are often effectively “locked in” for certain holding periods allowing investments to appreciate. While labor is of course exposed to the same effects, the duration is much shorter and the long term effects are not as noticeable.
Investors must keep their assets invested for appreciation.
Investors must sell assets to realize gains.
Selling may trigger tax and reduce the reinvestment base.
Long holding periods increase exposure to inflation and market risk, further eroding value.
IV. The Case That Capital Gains Taxation Is Not Double Taxation
A. All Income is Taxed
Supporters argue that the Capital Gains tax is not levied on the same income twice. Rather, the tax is applied to a new income stream – the appreciation of the asset in value. Classically, most income comes from Land, Labor, or Capital and Capital gains, like wages or interest, is a form of income that should be taxed.
From this perspective, only unrealized gains (conceptual gains in asset value, but not sold so the value is not realized or accessible) would be untaxed income. Once realized, they should face taxation like any other source of income.
B. Preferential Rates Offset Burden
To account for potential double taxation concerns, the U.S. tax code provides preferential tax rates for long-term gains. While ordinary income may face a top marginal tax rate (currently up to 37%), long-term capital gains face a top rate of 20% (plus 3.8% NIIT for high earners).
This rate differential is meant to:
Compensate for inflation and risk.
Encourage long-term investment.
Offset any perceived over-taxation due to prior taxation of investment income principal.
C. Deferred Taxation
Investors have the benefit of controlling the timing of their tax liability by when they choose to sell their assets. Unlike wages, which are taxed immediately and subject to other taxes, like Social Security and Disability insurance, capital gains taxation is deferred until the investor chooses to realize the gain. This allows:
Compounding growth without taxation drag.
Strategic tax planning.
Lower present value of future tax liability.
Some call this deferral a built-in subsidy that benefits investors and offsets claims of double taxation.
D. Addressing Income Inequality
While this item does not refute that Capital Gains is Double taxation, it speak to the concept of Fairness and balance. Capital gains are heavily concentrated among the wealthy. In 2021, the Top 1% of taxpayers earned 74% of all long-term capital gains in the U.S. [2]. If gains were exempt from taxation, a significant share of income would go untaxed. While a very small percentage, some Ultra High Net worth individuals may have enough Capital that their Asset appreciation may produce more than their lifestyle income requirements. For this group of individuals they can derive a majority, if not all, of their income through Capital appreciation vs labor. By taxing Capital gains you can offset this.
V. The Structural Problems in Capital Gains Taxation
Even if not technically double taxation, the structure of capital gains taxation introduces distortions and inefficiencies. The value of money, due to inflation, lowers over time. This makes the incentive to save and invest lower, if the economic rewards are not there for the risks of the lowering value of assets due to inflation.
A. Inflation Distortion
As noted, Capital gains are taxed on nominal (non inflation adjusted), not real (inflation adjusted), appreciation in asset value.
Sample: Effect of 3% Annual Inflation over 30 Years (~140%)
Nominal Gain (non adjusted)
Real Gain (inflation adjusted)
Tax Liability @ 20%
Effective Tax on Real Gain
$200,000
~$80,000
$40,000
50%
$300,000
~$125,000
$60,000
48%
Inflation increases the risk of investing by lowering the return in real value of a long-term holder’s gain. In essence lowering the purchasing power of their initial investment leading to disproportionately higher taxation on the real gains.
B. Lock-In Effect
Since tax is triggered by realization of the sale of appreciated assets, investors often delay selling assets to avoid tax, even if reallocation would be economically optimal. This “lock-in effect”:
Reduces liquidity.
Discourages portfolio rebalancing.
Distorts capital markets.
C. Wealth Leverage Arbitrage
Wealthy individuals increasingly use asset-backed loans to access liquidity without triggering taxable events. High net worth individuals can essentially deploy a Buy, Borrow, Die strategy to:
Borrowing against appreciated stocks or property.
Using proceeds for consumption/living expenses or investment.
Die without selling their assets and never realizing a taxable event.
This strategy—unavailable to many lower-wealth individuals—creates tax arbitrage. See our article on Buy Borrow Die for more details on this strategy and how it works.
VI. International Comparisons and Policy Alternatives
Several developed nations take different approaches to capital gains taxation, from none to the majority of it being taxed at ordinary income rates. It is important to note, that the the tax compositions of every country are different, and that a lower or higher capital gains rate does not necessarily equate to a higher overall effective tax rate.
Country
Treatment of Capital Gains
Belgium
Exempt for individuals (unless professional trader)
Switzerland
Often exempt for individuals; taxed if “professional”
UK
Taxed at 10% or 20% for individuals, some inflation relief
Canada
50% of capital gains included in taxable income
Germany
Taxed, but long-held property gains may be exempt
Several proposals in the U.S. to update the Capital Gains Tax have included:
Indexing capital gains for inflation: adjusting basis to reflect real purchasing power.
What it means: That the inflation adjusted amount would be removed and only the non inflation gain amount would be taxed, lowering the overall tax liability. This could encourage more people to invest.
Step-up basis reform: eliminating the reset of asset value at death.
What it means: When a person dies the benefactor receives the assets at the current valuation price. So for example if an asset has appreciated from $100,000 to $200,000 there would be an unrealized gain of $100,000. However, if the benefactor receives the asset and the current valuation is $200,000, they would have no taxable appreciation ($200,000 stepped up basis – $200,000 current valuation). This tax treatment significantly benefits the benefactor, and the tax efficiency of the estate.
What it means: Providing special exemptions so that smaller and lower income populations can invest, participate and benefit from the power of market based appreciation. Presumably with the intent to increase the wealth potential of market appreciation to larger portions of the population.
VII. Comparison
Item
Capital Gain
Income
Tax Treatment
Taxed on original Income, and Capital appreciation
Only taxed on Income.
Market Risk
Assets exposed to volatility and loss of principle based on investment
No Market Risks
Inflation Risk
Assets exposed to inflation over the period held.
No (limited) Inflation Risks
Deferral Benefit
Can choose when to realize gain.
Income taxed immediately
Preferred Tax Rates
Long Term Capital Gains taxed at 15% or 20%
Taxed at ordinary income rates up to 37%
Estate Benefit
Estate can pass to benefactor with stepped up basis.
No Estate Benefit
Payroll Taxes
Payroll taxes on original income, no additional Taxes (except NIIT) on Capital Gains
Additional Social Security, and Disability Insurance taxes taken out of Income
Access to Capital
Depends on asset, but generally no access to Capital during appreciation period. (Not assuming asset based loans)
Immediate access to Capital from Income
Accessibility
Vast majority of Capital Gains are buy high worth individuals
Not a significant portion of lower income earners
VIII. Capital Gains and Federal Revenue
Despite being taxed at lower rates and only upon realization, capital gains constituted a relatively small percentage of Federal Revenue, but a significant amount overall of Federal revenue:
In FY 2022, capital gains taxes generated approximately $250 billion in Federal revenue—around 8% of total federal individual income tax receipts [3].
The amount of revenue collected from Capital Gains is volatile. During economic booms, capital gains revenue can surge (e.g., $325B in FY2021); during recessions or economic turmoil it can plummet substantially (e.g., $89B in FY2009) [4]. Federal Tax revenues benefit substantially from Market appreciation.
IX. Conclusion: Double Taxation?
Whether capital gains taxation constitutes double taxation depends on how one defines the income base:
If the focus is on origin of funds (already-taxed income used to invest), then taxing gains may appear sequential (double).
If the focus is on new income stream created, then it is simply a form of taxing new income, no different than any other income.
The real issue may not be whether it’s “double taxed” but how fairly, efficiently, and equitably it is taxed—especially given the inflation effects, lock-in effects, and the concentration of gains among the wealthiest households. These are all decisions of Government, and Tax Payers (voters) how they wish to compose Government Revenue.
Capital gains taxation is not unique in its complexity or controversy. It is a structural component of US Federal Tax Revenue, and at times politically sensitive portion of U.S. tax code.
X. Capital Gains Tax Rates Over Time (U.S. Federal)
Historical Top Capital Gains Rates as shown in Figure 1. Short term Capital Gains have essentially followed Ordinary Income tax rates which have come down since the 1940’s, and Long Term Capital gains have been in the range of 15 to 28% since the 1980’s.
In the complex world of tax policy, few strategies spark as much public debate and scrutiny as “Buy, Borrow, Die.” This perfectly legal, yet often misunderstood and sometimes vilified, approach is a cornerstone of wealth preservation for America’s ultra-rich, allowing them to access significant liquidity without triggering the very capital gains taxes that much of the middle class routinely pays. For a younger generation facing unprecedented national debt and shifting economic landscapes, understanding this mechanism is crucial to grasping the nuances of fiscal policy and the distribution of wealth. It’s also important to denote that despite the rhetoric, patching this will not come anywhere near solving our annual trillion dollar budget deficits, but it can be part of the discussion on solutions.
Buy, Borrow, Die: The Strategy
Unlike most Americans, the ultra wealthy make significant portions of their income on assets, and not wages. Because of their substantial assets, they can employ strategies that aren’t available to most Americans. At its core, “Buy, Borrow, Die” is a three-pronged strategy designed to leverage appreciating assets, access cash, and ultimately pass wealth to heirs in the most tax-efficient manner possible by avoiding capital gain taxes.
The “Buy” Phase: Accumulation of Appreciating Assets
First step: accumulate assets with high growth potential. This typically involves investments like stocks, bonds, real estate, private equity, or even valuable collectibles. The key is that these assets are held for the long term, allowing their value to compound and appreciate significantly over decades. Unlike earned income (salaries, wages) which is taxed annually, the appreciation of these assets (unrealized capital gains) is generally not taxed until they are sold.
The “Borrow” Phase: Liquidity Without Taxation
Step Two: this is where the strategy diverges sharply from how most people access money. When the wealthy need cash for lifestyle expenses, new investments, or philanthropic endeavors, they don’t sell their appreciating assets. Selling would trigger capital gains tax on the accumulated profits. Instead, they borrow against the value of these assets.
The ultra-high-net-worth (UHNW) segment employs a variety of sophisticated borrowing strategies to access liquidity without triggering taxable events. These are individuals with more than $30 million in investable assets, representing less than 450,000 people world wide [21], so very few individuals can employ this strategy. While the underlying principle of “non-taxable loan proceeds” is consistent across these methods, the specifics of collateral, speed, and loan terms vary.
Buy, Borrow, Die Borrowing Mechanisms:
The wealthy leverage their assets to borrow with one of these mechanisms based on the type of asset, securities, real estate, businesses, art, etc. (See comparison Table 1 at end)
Securities-Backed Lines of Credit (SBLOCs):
Description: An SBLOC is a flexible, non-purpose line of credit offered by brokerage firms and banks, allowing individuals to borrow against the value of their non-retirement investment portfolios (stocks, bonds, mutual funds, ETFs). It is a revolving line of credit collateralized by liquid securities held in a brokerage account.
Characteristics: SBLOCs are highly liquid and relatively quick to set up, often with Loan-to-Value (LTV) ratios that can go up to 70-95% for diversified, highly liquid portfolios. Interest rates are typically competitive, often tied to SOFR (Secured Overnight Financing Rate) plus a small spread. SOFR rates can be very low due to their low risk, even lower than the Prime rate given to banks top customers. SOFR-based rates are lower than what normal consumers can access for personal loans or credit cards.
Mortgages and Home Equity Lines of Credit (HELOCs) on Appreciated Real Estate:
Description: UHNW individuals frequently own multiple, high-value properties (primary residences, vacation homes, investment properties) that have appreciated significantly. Instead of selling a property and incurring capital gains, they can take out a new mortgage or a Home Equity Line of Credit (HELOC) against the substantial equity in the property.
Characteristics: These loans are collateralized by real estate, involving appraisals and a more extensive underwriting process than SBLOCs. LTVs are generally lower than SBLOCs, typically around 70-80% of the home’s appraised value (minus any outstanding mortgage). Interest rates are often tied to the Prime Rate. For UHNW clients, these can be bespoke loans from private banks, with minimum loan sizes often in the millions of dollars [12]. Studies on UHNW real estate holdings consistently show them owning significant, high-value portfolios, making HELOCs and other property-backed loans a natural component of their liquidity strategies [10].
Leveraged Recapitalizations on Private Business Interests:
Description: For UHNW individuals whose wealth is primarily concentrated in a privately held business, a “leveraged recapitalization” allows them to extract significant liquidity without selling the entire business. The business itself takes on new debt (e.g., from banks, private credit funds, or through the issuance of leveraged loans), and a portion of these loan proceeds is then distributed to the owner as a tax-efficient dividend.
Characteristics: This is a sophisticated transaction often involving corporate finance experts. The business takes on the debt, separating the owner’s personal liquidity needs from the business’s operational financing. The owner receives cash without a full sale, maintaining control and benefiting from future appreciation of the business. The volume of dividend recapitalizations funded by leveraged loans, for instance, reached significant levels in recent years, demonstrating the scale of this strategy for private equity-backed companies and, by extension, the UHNW individuals who own or invest in them [14].
Loans Against Other Illiquid Assets (Art, Collectibles, etc.) & Private Bank Lines of Credit:
Description: The ultra-wealthy often hold significant wealth in unique, illiquid assets such as extensive art collections, rare collectibles, or even intellectual property. Specialized lenders, often private banks or boutique financial firms, offer loans collateralized by these assets. Additionally, private banks may offer broad, bespoke lines of credit (PBLOCs) that are collateralized by a mix of assets, including securities, real estate, and other valuables, providing a single, flexible credit facility tailored to the client’s overall net worth [10, 11].
Characteristics: These loans are highly customized. Valuation can be complex and expensive for these unique assets, and LTV ratios might be lower due to their illiquidity. While the market for art-backed loans is smaller than for other asset classes, it’s a key liquidity tool for UHNW individuals with high value collections [18]. The broader private credit market, which encompasses direct lending and financing against various assets, has grown significantly, nearing $2 trillion in assets under management (AUM) by 2024, demonstrating the immense capacity for non-traditional lending that can be utilized by the UHNW [15]. These types of loans are often a key component of holistic wealth management strategies for the UHNW, as highlighted by reports from global wealth managers [10, 11].
The critical tax advantage of all these borrowing methods is that loan proceeds are not considered taxable income by the IRS. You’re simply taking on debt that you’re obligated to repay. Therefore, by borrowing against their assets, the wealthy can access millions of dollars in cash without paying a single cent in capital gains tax, while their underlying assets continue to grow. This is a fundamental difference from an ordinary wage earner, who pays income tax on every dollar earned.
The “Die” Phase: The Great “Tax” Escape
Step Three: the final and most impactful leg of the “Buy, Borrow, Die” strategy comes into play at death. Under current U.S. tax law, when a person dies, their heirs receive a “stepped-up basis” on inherited assets. This means the cost basis of the assets (the original price paid by the deceased) is “stepped up” to the current fair market value on the date of the original owner’s death.
Consider an asset bought for $1 million that appreciated to $10 million. If the owner sold it during their lifetime, they would owe capital gains tax on the $9 million profit. However, if they hold it until death, their heirs inherit it with a new cost basis of $10 million. If the heirs then immediately sell it for $10 million, they incur virtually no capital gains tax, as their “profit” (sale price minus their new basis) is zero. The entire $9 million of appreciation during the deceased’s lifetime effectively escapes capital gains taxation forever. Any outstanding loans are typically repaid from the inherited assets, or the heirs can choose to assume the loan.
Scale and Revenue Impact
Accurately quantifying the exact usage of each borrowing mechanism to evaluate “Buy, Borrow, Die” strategies by UHNW individuals is challenging due to the confidential nature of private wealth management and the lack of granular public data. Market-wide figures for SBLOCs or HELOCs, while large, also include usage by individuals who are not necessarily engaged in tax-deferral strategies for multi-generational wealth transfer, many of which may not fall into the UHNW category so estimates are challenging.
However, a body of research points to the significant role of these borrowing tools in UHNW wealth management and highlights the immense scale of unrealized capital gains that ultimately might escape taxation.
Securities-Backed Loans (SBLOCs): While the total outstanding SBLOC market reached approximately $138 billion as of Q1 2024 [2], research from the Bipartisan Policy Center (BPC) explicitly notes that these loans are “overwhelmingly held by high-net-worth individuals” [9]. This suggests a strong correlation between this market size and UHNW borrowing for liquidity against liquid portfolios, often specifically to avoid capital gains. FINRA’s investor alerts on SBLOCs also highlight their use for “postponing realization of capital gains” by allowing clients to “retain control over the timing of capital gains and the potential taxes associated with a securities sale” [20].
Home Equity Lines of Credit (HELOCs) and Mortgages: The total HELOC debt nationwide was around $359.9 billion in 2024 [3], and the total home equity available for borrowing in the U.S. is estimated in the trillions [13]. For the UHNW, studies consistently show substantial allocations to real estate, often owning multiple properties. For example, a UBS Global Family Office Report often highlights real estate as a primary asset class for family offices, and these entities regularly employ bespoke lending solutions against these holdings for liquidity, rather than selling, which would incur capital gains [19].
Leveraged Recaps and Private Credit: While not always solely for individual liquidity, the growth of the private credit market (nearing $2 trillion in AUM by 2024 [15]) is a strong indicator of the expanding capacity for private businesses to take on debt. For UHNW individuals who are founders or significant owners of private companies, leveraged recaps are a well-documented strategy to extract wealth without triggering a sale event. Deloitte’s analysis on leveraged distributions confirms their use for early monetization by investors and shareholders, often structured to manage tax implications [4].
Loans Against Other Illiquid Assets & Private Bank Lines of Credit: The market for art-backed loans, while niche, serves the UHNW exclusively, with reports from major financial institutions catering to the UHNW acknowledging that lending against luxury assets is a tailored service [10, 11]. Furthermore, the Senate Finance Committee, in its report on Private Placement Life Insurance (PPLI), specifically highlighted how UHNW individuals use PPLI as a “tax-advantaged wrapper” for alternative investments (like hedge funds or private equity) and then “borrow from the policy at extremely favorable rates,” explicitly stating that PPLI is promoted as part of the “buy, borrow, die” strategy [18]. This demonstrates how complex financial products and less common asset classes are explicitly integrated into this overarching strategy.
The most substantial “missed” capital gains revenue is not from the immediate borrowing, but from the massive pool of unrealized capital gains held by the ultra-wealthy, which are ultimately shielded by the stepped-up basis at death.
Total Unrealized Capital Gains: According to an analysis by Americans for Tax Fairness of Federal Reserve data, America’s billionaires and centi-millionaires (those with at least $100 million in wealth) collectively held at least $8.5 trillion of “unrealized capital gains” in 2022 [16]. This figure represents profits from unsold investments that may never be taxed under current law. The Institute on Taxation and Economic Policy (ITEP) similarly found that among families with more than $30 million in wealth, an estimated 43% of that wealth (or almost $17 trillion nationwide) takes the form of unrealized gains [17]. This immense pool of untaxed wealth is the real “elephant in the room” when discussing “missed” revenue.
“borrowing against assets appears to be a relatively minor source of cash income for wealthy Americans in the aggregate.”
Specifically, Liscow and Fox (2025) found that borrowing (of any kind) represents only 1% of the economic income of the top 0.1% by net worth. This contrasts sharply with the massive amounts of unrealized gains these individuals hold. This suggests that for the ultra-wealthy, the dominant strategy for tax avoidance is not primarily borrowing to consume, but simply not selling and letting gains accrue until death (“Buy, Save, Die”). As Liscow and Fox note, “the rich don’t avoid higher taxes primarily through borrowing; they just earn substantially more than they consume on an annual basis” [6].
The implication of these findings is that while reforms designed to include loan proceeds in taxable income (e.g., treating borrowing as a “deemed realization” event) would generate some revenue (Yale estimates $102 billion to $147 billion over ten years), their potential is “somewhat limited in their revenue potential compared with more fundamental reforms of capital income taxation” [5]. Still, the Yale Budget Lab concludes that “from a first-principles perspective, policy changes aimed at limiting buy-borrow-die are a natural place for reform in the current tax code.” These findings suggest that taxing the borrowing would have little impact on revenue, but the real wealth transfer is the “stepped up” basis of assets completely bypassing Capital Gains forever.
Potential Impacts and Fairness Discussions
Implementing a tax on borrowing against unrealized capital gains, or eliminating the stepped-up basis, would spark considerable debate:
Arguments for Change (Fairness & Efficiency):
Tax Equity: Proponents argue that the current system allows the wealthy to pay a disproportionately low effective tax rate on their economic gains, especially when compared to wage earners who pay income tax on every dollar. This disparity fuels concerns about fairness and contributes to wealth inequality.
Economic Efficiency: The “lock-in effect” (the incentive to hold appreciated assets indefinitely to avoid capital gains tax) discourages wealthy individuals from selling, even if it makes economic sense to reallocate capital. This can lead to inefficient allocation of capital in the economy.
Revenue Generation (Long-Term): While taxing current borrowing might be limited, more comprehensive reforms like eliminating the stepped-up basis could unlock significant revenue. The Joint Committee on Taxation (JCT) estimates that the stepped-up basis will account for $58 billion in forgone revenues in 2024, rising to $68 billion by 2027 [7]. The Congressional Budget Office (CBO) has estimated that replacing stepped-up basis with a “tax at death” on unrealized gains could raise about $536 billion over 10 years [8]. The Bipartisan Policy Center (BPC) similarly estimates that repealing stepped-up basis would increase revenues by $130 billion over 10 years [9].
Arguments Against Change (Economic Impact/Practicality):
Disincentive to Invest: Critics argue that taxing unrealized gains or making borrowing more expensive could discourage investment and capital formation, ultimately harming economic growth.
Liquidity Issues: For assets like real estate or private businesses, selling to pay a tax could be impractical or forced, especially if the estate doesn’t have enough cash. This could lead to forced sales and disruption. This became very problematic in Silicon Valley when employee options were millions but cash poor employees were unable to sell to access the value.
Valuation Challenges: Accurately valuing illiquid assets (like private businesses or art) at death for tax purposes could be complex and administratively burdensome.
Personal Freedom and Individual Liberty: Opponents often frame proposals to tax unrealized gains or eliminate stepped-up basis as an infringement on personal freedom and individual liberty, arguing that individuals should have the right to hold onto their assets without continuous government claims on accumulated wealth until it is seized or transferred. They contend it moves towards a system where the government has a more pervasive interest in private property, potentially discouraging wealth creation and intergenerational transfers, and raising concerns of government over reach.
Double Taxation: Some argue that taxing capital gains at death, in addition to potential estate taxes, constitutes unfair “double taxation” of the same wealth.
Conclusion
The “Buy, Borrow, Die” strategy, enabled by the non-taxable nature of loans and, crucially, the stepped-up basis at death, presents a stark contrast to how average citizens encounter the tax system. While the Yale study’s findings suggest that borrowing to consume represents a relatively small portion of the wealthy’s economic income, the overall scale of wealth involved in this strategy is immense. The combined figures for SBLOCs, the broader HELOC market, and the vast private credit landscape demonstrate how much capital can be accessed by leveraging assets without selling them.
More importantly, the core “loophole” for those who earn on their capital, rather than labor, is the stepped-up basis rule. With trillions of dollars in unrealized capital gains held by the ultra-wealthy, and tens to hundreds of billions in projected forgone federal revenue due to stepped-up basis, this is the most direct and impactful area for reform. Eliminating or significantly modifying this provision—perhaps by adopting a “carryover basis” where heirs inherit the original cost basis, or by instituting a “tax at death” on unrealized gains above a certain threshold—would be the most direct and impactful way to ensure that accumulated capital gains are eventually subject to taxation, regardless of how long assets are held. However, such reforms also face significant practical and economic objections. Critics argue that taxing unrealized gains or eliminating stepped-up basis could disproportionately harm families whose wealth is primarily tied up in illiquid assets, such as small businesses or generational farms, forcing them to sell productive assets simply to pay tax bills. It could also create severe liquidity challenges for employees of successful startups who are “paper rich” with highly appreciated stock but lack immediate cash. Furthermore, concerns exist that such changes could disincentivize long-term investment, curb capital formation, and lead to broader, yet unforeseen, negative impacts on economic growth and innovation across various sectors of the economy. Such a shift would aim to ensure that the growth of significant wealth is eventually recognized and taxed upon realization or transfer, moving towards a system where appreciated capital gains are more consistently part of the tax base.
Comparing Borrowing Mechanisms of the Wealthy
Feature / Question
Securities-Backed Lines of Credit (SBLOCs)
Mortgages / Home Equity Lines of Credit (HELOCs)
Leveraged Recapitalizations (Private Businesses)
Loans Against Illiquid Assets / Private Bank Lines of Credit (PBLOCs)
[8] Congressional Budget Office (CBO). “Change the Taxation of Assets Transferred at Death.” Options for Reducing the Deficit. February 2025. https://www.cbo.gov/budget-options/60943
Tax Project Institute is a fiscally sponsored project of MarinLink, a California non-profit corporation exempt from federal tax under section 501(c)(3) of the Internal Revenue Service #20-0879422.
