The Tax Problem
Why selling appreciated stock is so expensive
For high-income investors — particularly in California — selling appreciated stock triggers a combined tax rate that can exceed 37%. The math is straightforward but painful:
| Tax Component | Rate (High Earner, CA) |
|---|---|
| Federal long-term capital gains | 20% |
| Net Investment Income Tax (NIIT) | 3.8% |
| California state tax on gains | 13.3% |
| Combined maximum rate | 37.1% |
For an investor holding $2 million of stock with a $400,000 cost basis, selling triggers a $1.6 million taxable gain — potentially $593,600 in combined federal and California taxes. That's nearly 30% of the entire position value gone to taxes immediately.
This creates the concentrated stock trap: your wealth is locked inside a position that you cannot exit without massive tax friction. You need liquidity, but the price of getting it through a sale is extraordinarily high.
How Borrowing Works
Why a loan is not a taxable event
Under U.S. tax law, borrowing money is not a realization event. When you pledge stock as collateral and receive loan proceeds, you have not sold anything — you've created a liability, not income. The IRS does not treat loan proceeds as taxable income because you have an obligation to repay.
"The IRS taxes realization events — sales, exchanges, and dispositions. Pledging stock as collateral for a loan is none of these. The stock remains yours. No gain is recognized until a sale actually occurs."
This is the core reason wealthy investors borrow against portfolios instead of selling. The strategy doesn't eliminate the capital gains tax — it defers it. The tax liability still exists in the form of unrealized gains. But deferral has significant value:
Time value of money
Deferred taxes allow the full pre-tax amount to remain invested and compounding. A $600,000 tax bill deferred 10 years at 8% growth represents over $1.2 million in foregone returns if paid today.
Step-up in basis at death
Under current law (IRC §1014), heirs receive a stepped-up cost basis — potentially eliminating the capital gains tax entirely. This makes "borrow, never sell" a viable estate planning strategy.
Rate optionality
Tax rates change. Capital gains rates have varied from 0% to 39.9% over the past 50 years. Deferring preserves the option to sell when rates may be lower — or to avoid realization entirely.
Example
The math: selling vs borrowing vs doing nothing
Consider a Google engineer in Mountain View with $1.5 million in vested Alphabet shares, cost basis $300,000, who needs $500,000 for a home down payment.
Scenario: $500K Needed — GOOGL Position $1.5M (Basis: $300K)
Sell $625K of Stock
$120,500
Immediate tax on $500K gain
Must sell ~$625K to net $500K after 37.1% combined tax on the $500K in gains (proportional basis). You also permanently lose exposure to those shares.
Borrow $500K Against Portfolio
$30,000/yr
Annual interest cost at ~6%
No tax triggered. Full $1.5M position continues to grow. Interest cost is $30,000/year — which would take 4+ years to equal the tax bill from selling. But you carry market risk.
Break-Even Analysis: At 6% interest, the cumulative interest cost equals the one-time tax bill after approximately 4 years. If you plan to repay the loan within 3–4 years (through salary, bonus, or gradual sales), borrowing may save money. Beyond 4 years, the calculus shifts unless the stock continues to appreciate substantially.
This example assumes stable interest rates and no market decline. If GOOGL drops 30% while you hold a $500,000 loan, your loan-to-value jumps from 33% to 48% — approaching maintenance territory. If it drops 50%, you may face a margin call requiring immediate repayment or additional collateral.
When Borrowing Wins
Situations where the math favors borrowing
Borrowing Makes Sense When
- Short-term liquidity need (1–3 years) with clear repayment source
- Embedded gains are very large (low basis, high current value)
- You're in a high-tax state like California (37.1% combined rate)
- You have strong external cash flow to service interest
- You expect the stock to appreciate and want to keep exposure
- Estate planning — step-up in basis eliminates gains at death
Selling Is Smarter When
- The position is a concentration risk you want to eliminate
- Your gains are short-term (taxed at ordinary income rates regardless)
- Interest rates are high and rising
- You have no clear repayment plan
- The stock is highly volatile and could trigger a margin call
- You've already maximized your risk tolerance on the position
The Embark Strategy
Diversify Without Selling Your Stock
Engineers at Google, Meta & Apple use Embark’s IRS 721 strategy to unlock income and diversification from concentrated positions — with no taxable event.
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Cost Comparison
Interest expense vs capital gains tax over time
The key question is: does the annual interest cost justify the tax savings? Here's how to think about it:
| Loan Duration | Cumulative Interest (6% on $500K) |
|---|---|
| Year 1 | $30,000 |
| Year 2 | $60,000 |
| Year 3 | $90,000 |
| Year 4 | $120,000 — approaches tax bill |
| Year 5 | $150,000 — exceeds tax bill |
| Year 10 | $300,000 — 2.5x the tax bill |
Variable Rate Risk: These numbers assume a constant 6% rate. If rates rise to 8% (as they did in 2023), annual interest jumps to $40,000 — accelerating the break-even timeline to roughly 3 years. Always model higher-rate scenarios when planning.
The calculation changes if the stock appreciates. If your $1.5 million position grows to $2.5 million over 5 years while you hold the loan, you've gained $1 million in unrealized appreciation that would have been lost had you sold. In this scenario, the interest paid ($150,000) is far outweighed by the additional growth ($1 million) — but this outcome is not guaranteed.
How the Wealthy Use It
Buy, borrow, die — the tax deferral strategy
High-net-worth investors and family offices have long used a strategy informally known as "buy, borrow, die" — accumulate appreciating assets, borrow against them for liquidity (never selling), and at death the heirs receive a stepped-up basis under IRC §1014, potentially eliminating the embedded capital gains entirely.
This strategy works because: (1) borrowing is not a taxable event, (2) interest payments may be partially deductible, and (3) the step-up in basis at death can eliminate hundreds of millions in unrealized gains. It's the reason some billionaires report very low taxable income despite enormous wealth.
Legislative Risk: The stepped-up basis provision has been targeted by multiple congressional proposals in recent years. If repealed or modified, the 'buy, borrow, die' strategy becomes significantly less attractive. Any long-term plan relying on step-up should account for the possibility that this benefit may not exist in its current form indefinitely.
For most investors, the full "buy, borrow, die" strategy requires multi-generational wealth planning and substantial assets. But the underlying principle — defer taxes through borrowing when the interest cost is lower than the tax cost — applies to portfolios of $500,000 and above.
The Embark Approach
Income from appreciated stock without debt or tax
Borrowing against appreciated stock solves the tax problem by creating a debt problem. You avoid the capital gains trigger, but you take on interest expense, variable-rate risk, and the existential threat of forced liquidation during a market downturn.
The Embark Approach
Income, Not Debt
Generate 10%+ annual yield instead of paying 5–7% interest
§721 Tax Deferral
In-kind contribution is not a taxable sale — same benefit as borrowing
No Margin-Call Risk
You're not leveraged — market declines don't trigger forced liquidation
Professional Management
Institutional options strategies managed by specialists
For investors whose primary goal is ongoing income from an appreciated position — not a one-time lump sum — Embark's §721 SPV structure offers the tax deferral benefit of borrowing without the cost, risk, or repayment obligation. Your stock generates income for you rather than serving as collateral for someone else's loan.
FAQ
Tax questions investors ask most
Is borrowing against stock taxable?
No. Borrowing against stock does not trigger a capital gains tax because no sale occurs. Loan proceeds are not income — they are borrowed funds that must be repaid. The unrealized gain remains in the position until an actual sale occurs.
Do I owe capital gains tax when I borrow against stocks?
No. Pledging shares as collateral is not a realization event under the Internal Revenue Code. However, if the lender forces a sale (liquidation due to a margin call), that IS a taxable event — potentially at the worst possible time.
Is securities-backed loan interest tax deductible?
It depends on how you use the proceeds. Interest on loans used for investment purposes may be deductible as investment interest expense (subject to limitations). Interest on loans used for personal purposes (home purchase, lifestyle) is generally not deductible.
Is it better to sell stock or borrow against it?
It depends on: (1) the size of embedded gains, (2) your tax rate, (3) how long you need the money, (4) current interest rates, (5) your confidence in the stock, and (6) your risk tolerance for margin calls. For short-term needs with large embedded gains, borrowing often wins. For long-term liquidity needs or highly volatile positions, selling may be safer.
How do wealthy investors avoid selling appreciated stock?
Common strategies include: borrowing against the portfolio, contributing to exchange funds, using §721 partnership structures (like Embark's SPV), implementing protective collars, setting up charitable remainder trusts, or using prepaid variable forward contracts. Each has different trade-offs in terms of cost, complexity, and risk.
Securities-Backed Lending Series
3 of 8
Tax-Efficient Income
Neither Sell Nor Borrow — There's a Third Option
Borrowing against stock avoids immediate capital gains but creates debt. Embark's §721 SPV generates 10%+ targeted annual income from concentrated appreciated positions — with no taxable event, no interest cost, and no forced-liquidation risk.