The Real Capital Gains Tax Loophole Isn’t Borrowing—It’s Dying

The “buy, borrow, die” slogan—a favored explanation for how the ultrawealthy sidestep taxes—makes for great headlines, but what if it’s wrong? According to recent research from the University of Michigan, the wealthy aren’t borrowing against their assets to avoid taxes. They’re simply sitting on unrealized gains, knowing those gains will vanish at death thanks to the step-up basis. With tax reform on the 2025 docket, this is the moment to eliminate it.

The step-up basis—a new cost basis equal to the market value of the investments at the time of death—isn’t some obscure quirk in the code. It’s a century-old feature of how wealth is passed down. Records were messy and valuation methods were difficult to come by in the early 20th century. But today, when everything from private equity to nonfungible tokens has available pricing data or a standardized valuation framework, the step-up basis is a policy relic that disproportionately benefits those least in need of a break.

It’s also one of the largest annual tax expenditures, expected to amount to more than half a trillion dollars over tax years 2024–2033. This reflects bad policy and essentially bakes structural inequity into the tax code.

The real story of tax avoidance, however, is one of a system that allows trillions of dollars in economic income to go untaxed. As lawmakers barrel toward a showdown over expiring tax provisions, this is a revenue leak hiding in plain sight—you can’t tax gains that are never realized. Eliminating the step-up in basis at death might be the cleanest way to finally plug up the hole.

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When it comes to tax fairness, the narrative that the ultrawealthy are leveraging their holdings to take out tax-free loans has driven policy debate. Elon Musk borrows billions against Tesla Inc. shares to purchase Twitter, Jeff Bezos takes out loans backed by Amazon.com Inc. stock to fund his lifestyle, and these specific examples are used as more general explanations for how the wealthy avoid paying taxes on their holdings.

The strategy works, and a handful of headline names may be using it aggressively—but the key word there is handful. New borrowing for the top 1% appears to just be 2% of their economic income—that is, their total taxable income plus total gains.

Most of the wealthiest taxpayers don’t need to borrow, as their taxable income more than covers the cost of their lifestyles. The ultrawealthy don’t appear to be gaming the system through debt as much as they are just sitting on their gains—and the tax code rewards them, or their heirs, for doing so.

If ultrawealthy households are consuming less than their taxable income, they can fund their day-to-day expenses through regular income—business profits, dividends, interest, executive compensation, and the like. They pay tax on that and let the rest of their wealth grow to be passed on to their heirs untouched.

The result is about 40% of their economic income goes entirely untaxed during their lifetimes and is then only taxed through the estate tax system. There taxpayers can exclude $13.99 million from taxation, or double that for married couples—meaning the first $27.98 million of unrealized capital gains can potentially pass to heirs tax-free.

Those heirs receive the assets with a step-up basis. The entire lifetime of unrealized gains simply vanishes from the tax rolls. It isn’t deferred taxation—it’s disappeared taxation.

If “buy, save, die” and not “buy, borrow, die” is the strategy actually in practice, then the step-up basis is the linchpin that makes it work. Take a simple example: You buy $1,000 worth of stock in 1990. By 2025, it’s worth $100,000. If you sell it, you owe capital gains tax on the $99,000 of appreciation.

But if you hang onto it until death, your heirs inherit the asset with a new basis of $100,000, the market value on the day you died. The $99,000 gain is gone—it was never taxed, and now never will be. If your heirs sell those shares for $100,000 a moment after inheriting them, they’ll pay no capital gains taxes on the transaction.

Taxing unrealized gains every year would be a quick fix for this issue but would be difficult in practice because not every asset has clear pricing. Marking to market a minority stake in a small family business or a classic car collection every April would be administratively onerous.

Additionally, a yearly tax on unrealized gains would create liquidity problems. Taxing people on paper gains without offering a clear path to pay the bill risks hardship and potential market instability.

Taxing gains at death, on the other hand, is about as administratively low-impact as it gets. The estate will already be valued for purposes of the estate tax. There’d be no liquidity crisis, no valuation hurdles, and no impact on the original owner. Unrealized gains would simply travel through the capital gains tax system to be offset against capital losses. To avoid double taxation, they would be kept out of estate tax calculations.

Ending the step-up basis would close a loophole and turn deferred capital gains into realized ones on a generational cycle. If we’re serious about raising revenue, addressing inequity, and restoring the basic idea that economic income should be taxed like income, then this is the obvious place to start.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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