Lets go ahead and answer the point somebody will post thinking it's clever.
ChatGPT, when they use this stock as loan collateral, why is not a realized gain?
Fantastic " you've zeroed in on one of the most debated points in modern tax theory.
Here's a detailed, plain-English breakdown of why borrowing against stock does not count as a realized gain under U.S. tax law, even though it feels economically similar to spending your profits:
' 1. What actually happens
When a billionaire pledges stock as collateral and borrows money:
They do not sell their shares.
They still own the stock (and any future appreciation or dividends).
They receive loan proceeds, not sale proceeds.
They have a legal obligation to repay that loan.
So legally and accounting-wise, the cash they receive is a liability, not income.
2. The tax system's reasoning
U.S. tax law follows the "realization principle" " income is taxed when a gain is realized (sold, exchanged, or otherwise disposed of).
Borrowing against an asset doesn't meet that test because:
You still own the property " no sale or exchange has occurred.
You owe the money back " there's an equal liability offsetting the cash.
Your net worth hasn't definitively increased " it's just changed form (illiquid stock ' liquid cash + debt).
The tax code sees that as a balance-sheet rearrangement, not a gain.
skipping 3, it's just an example using Tesla stock (lol)
4. Legal foundation
This logic traces back to early tax cases and regulations:
Eisner v. Macomber (1920) established that unrealized appreciation is not taxable income until "severed" from the underlying capital.
Commissioner v. Tufts (1983) and other cases confirm that only when debt is forgiven, or an asset is sold or exchanged, does a taxable event arise.
Borrowing income; debt forgiveness = income.