How Public Company Executives Borrow Against Their Shares to Defer Taxes
For ultra-wealthy individuals and executives of public companies, borrowing against their shares is a powerful financial strategy. This method allows them to access liquidity without triggering capital gains taxes, which they would owe if they sold their stock. This tax-efficient strategy is widely used by billionaires, including Elon Musk and Mark Zuckerberg, to maintain their wealth while leveraging their holdings.
In this article, we’ll break down how borrowing against shares works, why it’s beneficial, the risks involved, and real-world examples of its application.
How Borrowing Against Shares Works
1. Using Stocks as Collateral
When a company is public, its shares can be freely traded on a stock exchange. Executives and major shareholders often own a large portion of the company’s stock, making it their primary asset. Instead of selling shares, they use them as collateral to secure a loan from a bank or financial institution.
2. Avoiding Capital Gains Taxes
If a shareholder sells stock, they must pay capital gains taxes on any profits. In the U.S., long-term capital gains tax rates range from 15% to 20%, and some states impose additional taxes. By taking out a loan instead of selling, they gain access to cash without triggering a taxable event.
3. Lower Interest Rates Than Traditional Loans
Stock-based loans (also called securities-based loans or margin loans) typically come with lower interest rates than personal loans or mortgages. These loans are considered low-risk for lenders, as they are backed by highly liquid assets.
4. Continuous Refinancing and Tax Deferral
Borrowers can keep refinancing their loans indefinitely, meaning they may never need to sell their shares. This allows them to maintain ownership, benefit from stock appreciation, and continue deferring taxes.
Real-World Examples
1. Elon Musk's Stock-Backed Loans
Elon Musk has frequently borrowed against his Tesla stock to fund other ventures and acquisitions. In 2022, Musk used over $12.5 billion in loans backed by his Tesla shares to help finance his Twitter acquisition. By doing so, he avoided selling stock and incurring capital gains taxes.
However, because Tesla’s stock price fluctuates, he had to sell shares later to meet debt obligations when the stock dropped. This highlights the risk of using stock-backed loans.
2. Mark Zuckerberg and Meta
Mark Zuckerberg has also borrowed against his Meta (formerly Facebook) shares to fund his lifestyle and philanthropic activities. Like Musk, he benefits from low-interest loans while retaining control over his company.
Key Benefits of Borrowing Against Shares
1. Liquidity Without Selling
This strategy allows executives and major shareholders to access cash without reducing their ownership stake or affecting stock prices.
2. Tax Efficiency
Since loans are not considered income, they are not taxable. This allows individuals to defer capital gains taxes and maintain wealth.
3. Leverage for Investment
Borrowed money can be used to invest in other businesses, real estate, or startups, further compounding wealth.
4. Low-Cost Borrowing
These loans often have interest rates as low as 1–4%, significantly cheaper than other forms of borrowing.
Risks and Potential Downsides
1. Margin Calls and Forced Liquidation
If the stock price drops significantly, the lender may require additional collateral. If the borrower cannot provide it, the lender may force the sale of shares, potentially triggering large tax liabilities and financial losses.
2. Interest Payments
Although interest rates are low, they still require cash flow to cover loan payments. If the borrower doesn’t have other income sources, this could be an issue.
3. Stock Volatility
Stocks are inherently volatile. If the stock crashes, the borrower may owe more than their shares are worth.
Is This Strategy Right for You?
This approach is primarily beneficial for high-net-worth individuals with significant stock holdings in public companies. For regular investors, leveraging securities-based lending may still be an option, but it carries considerable risk.
Alternative Strategies for Regular Investors:
Selling stocks and using tax-loss harvesting to minimize tax liabilities.
Using dividend-paying stocks for passive income instead of borrowing.
Investing in diversified portfolios to reduce volatility risks.
Final Thoughts
Borrowing against shares is a powerful financial strategy used by wealthy individuals to access liquidity, avoid capital gains taxes, and maintain ownership of their companies. However, it comes with risks, particularly in volatile markets where stock prices fluctuate dramatically.
For everyday investors, stock-backed lending can be an option, but it's crucial to understand the potential downsides. If not managed properly, a margin call could lead to significant financial losses. As always, consulting a financial advisor is recommended before considering such a strategy.