Last week we covered In-Q-Tel — the CIA's venture capital fund that invested in Google Earth and Palantir using taxpayer money, generating returns that flow into classified programs.

This week: the tax strategy that allows billionaires to access billions without ever paying taxes. It's not evasion. It's understanding that borrowing isn't income.

In 2021, ProPublica published leaked IRS data showing that Jeff Bezos paid a 0.98% effective tax rate between 2014 and 2018. Elon Musk: 3.27%. Warren Buffett: 0.10%.

The immediate reaction was outrage. The informed reaction was: of course they did.

These aren't loopholes. This is the fundamental architecture of how the tax code treats wealth versus income. And once you understand the mechanics, you realize the system isn't broken — it's working exactly as designed.

The strategy has a name in tax planning circles: Buy, Borrow, Die.

Here's how it works.

The strategy operates in three steps, each exploiting a different feature of the tax code.

Step 1: Buy assets that appreciate.

Stock in a company you founded. Real estate. A business. Anything that grows in value over time. The key is to never sell. Selling triggers capital gains tax. Holding doesn't.

Step 2: Borrow against those assets.

When you need cash, you don't sell. You use your appreciated assets as collateral for a loan. Banks will lend you 40-70% of the asset's value at interest rates of 2-5% annually. Borrowing is not a taxable event — the IRS doesn't consider loans to be income because you have an obligation to repay them.

You get liquidity without triggering taxes.

Step 3: Die, and the tax disappears.

When you die, your heirs inherit your assets with a stepped-up basis — meaning the cost basis resets to the fair market value at death. All the appreciation that occurred during your lifetime is never taxed. Your heirs can sell immediately at the new basis and owe nothing.

The loan gets paid off from the estate, or more commonly, the heirs refinance it and continue the cycle.

That's the concept. Now here's what it looks like with real numbers.

Jeff Bezos owns roughly 10% of Amazon. At current valuations, that's approximately $180 billion in stock. His cost basis — what he originally paid for those shares when he founded the company — is essentially zero.

If Bezos wanted to access $10 billion to fund his lifestyle, he has two options.

Option A: Sell the stock

$10 billion sale triggers capital gains tax. At the federal rate (20%) plus net investment income tax (3.8%) plus California state tax where he lived at the time (13.3%), that's roughly 37% total.

Option B: Borrow against the stock

Bezos pledges $15 billion worth of Amazon stock to a private bank — Morgan Stanley, Goldman Sachs, JPMorgan. The bank offers a securities-backed line of credit at 60% loan-to-value. That's $9 billion in available credit.

He draws $1 billion. Interest rate: 2-3% annually. That's $20-30 million per year in interest.

Compare the math:

Selling $1 billion in stock leaves him with $630 million after taxes.

Borrowing $1 billion costs him $25 million per year in interest. Even after 10 years ($250 million total interest), he's still ahead by $120 million compared to selling.

And that's before accounting for the fact that his Amazon stock continues appreciating while he's paying interest. In many years, the stock appreciation exceeds the interest cost.

From the bank's perspective, this is the safest loan they'll ever make. The collateral is publicly traded, liquid, and belongs to one of the wealthiest people on earth. Default risk: essentially zero.

If Amazon stock drops and the loan-to-value ratio exceeds the bank's threshold, they issue a margin call — Bezos posts more collateral or pays down part of the loan.

The bank also wants the relationship. Lending to Bezos means managing his other assets, handling his foundation, financing his real estate purchases, providing investment banking services. The loan is the entry point to billions in fees.

Let's say Bezos dies when his Amazon stake is worth $300 billion. His heirs inherit it with a $300 billion cost basis — the fair market value at death.

If they sell it immediately, they owe zero capital gains tax because there's no gain relative to the new basis. The $300 billion in appreciation that occurred during Bezos's lifetime is never taxed.

The loan? The estate sells just enough stock to pay it off — at the stepped-up basis, so minimal tax. Or the heirs refinance the loan using the inherited stock and continue borrowing.

The cycle repeats. Wealth compounds across generations with taxes perpetually deferred and ultimately eliminated.

Elon Musk disclosed $88.3 billion in outstanding personal loans secured by Tesla stock in SEC filings. He's publicly stated he has "almost no cash" despite a net worth over $200 billion. He lives off borrowed money.

Warren Buffett has used this strategy for decades. So has Larry Ellison. Mark Zuckerberg. Every billionaire does this.

It's not an exception. It's the standard operating procedure for managing significant wealth.

ProPublica's data showed that the 25 wealthiest Americans collectively paid an effective tax rate of 3.4% between 2014 and 2018. This is how. Not through illegal schemes, but through borrowing against appreciating assets and never selling.

The full version — billions borrowed at 2-3% from private banks — requires $10-50 million minimum in investable assets.

But the principle scales down.

If you have $500,000 in a brokerage account, most brokers will lend you $250,000-$350,000 at 5-8% interest through a margin loan or portfolio line of credit. That's still cheaper than selling and paying 20-37% in capital gains tax depending on your state.

If you own a business worth $5 million, you can pledge equity to a lender and draw cash without triggering a taxable sale of the business.

If you own appreciated real estate, you can do a cash-out refinance and pull equity without paying capital gains tax.

The core insight isn't about the specific dollar amounts. It's about the mental model: stop thinking about realizing gains. Start thinking about accessing liquidity without triggering taxable events.

The tax code is structured to reward people who accumulate assets, not people who earn income from labor. Understanding this distinction is the difference between paying 35% and paying 3%.

Securities-backed lending works brilliantly when asset values are stable or rising. It becomes catastrophic when markets crash.

In March 2020, when the S&P 500 dropped 35% in a month, thousands of margin loans were called. Investors who were over-leveraged were forced to either post additional collateral immediately or sell assets at the worst possible moment to repay loans — locking in massive losses and triggering tax bills simultaneously.

Elon Musk himself nearly faced this in 2022 when Tesla stock dropped 65% from its peak. He had borrowed so heavily against his shares that he was at risk of forced liquidation. He had to sell billions in stock to avoid margin calls — exactly the outcome the strategy is designed to prevent.

The strategy works when you borrow conservatively. Most wealth advisors recommend loan-to-value ratios of 40-50% maximum, with enough liquidity to handle a margin call without forced selling. At 70% LTV, you're one market downturn away from disaster.

Diversification also matters. If all your collateral is in one stock and that stock craters, you have no cushion. Spreading collateral across multiple asset classes reduces the risk that a single event wipes you out.

This isn't a strategy you implement aggressively. It's a tool you use carefully, with professional guidance, and with enough reserves to survive volatility.

The stepped-up basis rule wasn't designed as a gift to billionaires. It was created in 1921 as a simplification measure — the IRS didn't want to force heirs to track cost basis records going back decades when someone died.

What it became: the single most valuable estate planning tool for the ultra-wealthy.

There have been proposals to eliminate it. Biden's 2021 budget proposed taxing unrealized capital gains at death above $1 million. It was dead on arrival.

Why? Because every major bank, every wealth management firm, every family office, and every estate planning attorney depends on this structure. Eliminating stepped-up basis would force trillions in asset sales to pay taxes at death. The market disruption would be catastrophic.

The lobbying from financial institutions killed the proposal within weeks.

So the rule stays. And the people who understand how to use it — or who can afford advisors who do — pay effective tax rates lower than their assistants, their drivers, and the people who clean their homes.

It's not corruption. It's structure. The system is working exactly as designed.

If you own significant appreciated assets — stocks, real estate, a business — talk to a financial advisor or tax attorney about securities-backed lending before you sell. The tax savings can be substantial even at modest wealth levels.

If you're building wealth, understand that the endgame isn't a high income. It's accumulating appreciating assets that you can borrow against. The tax code punishes labor and rewards capital. Structure accordingly.

And if you've ever wondered why billionaires pay lower tax rates than teachers, now you know. It's not because they're cheating. It's because they're playing a game with different rules — rules written into the tax code and available to anyone who knows they exist.

The Dark Money Letter is published every week.

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