Tax Strategy #2: Borrowing Against Your Portfolio Tax-Free Instead Of Selling

Instead of selling assets and paying taxes when you need income, you can borrow against your portfolio, not pay taxes on the income and even get a tax-deduction for doing so

Background: How Do We Access Our Wealth Tax-Free?

In Tax-Strategy 1 we talked about the importance of investing for the long-run instead of selling for short-term needs so that your beneficiaries—be it your spouse or your kids can inherit wealth tax-free.

But if you only leave that for your kids or spouse to inherit, that tax-free wealth is for someone else besides you.

How do you access that tax-free wealth for yourself?

And the answer is to borrow tax-free against your wealth for yourself.

That way you get tax-free income, tax-deductions AND get to benefit from the future appreciation of your portfolio—instead of having to sell assets, pay taxes, and lose out on future gains.

The best way to see this is through an example and I’m going to use Elon Musk’s $44 billion purchase of Twitter as an example.

Instead of Elon Musk selling $70 billion worth of his Tesla shares so that he could pay taxes and afford the $44 billion purchase price, he borrowed $44 billion against his Tesla shares to purchase Twitter so he didn’t have to pay $26 billion in taxes while also keeping his Tesla shares.

Borrowing $44 billion instead of selling $70 billion worth of shares allowed Elon to benefit from $58 billion worth of Tesla share value that he wouldn’t have had if he sold the Tesla shares.

On top of that, Elon received $9.5 billion of tax-deductions due to the borrowed interest that he could use to offset future sales of Tesla shares.

Table 1: Profiting From Future Appreciation By Borrowing

Between October 2022 and August of 2026, Elon Musk’s $70 billion in Tesla shares grew to $112 billion (Column A). Had he sold the $70 billion in shares to purchase Twitter, he would have lost out on the $58.5 billion (Column C) in net value (after subtracting the loan and accrued interest). On top of that Elon accrued $9.5 billion in interest deductions (Column D) that he could use to offset future capital gains

How Elon Purchased Twitter Using a Loan He Will Likely Not Have to Pay Back Until Death

In October of 2022 Elon Musk decided he wanted to purchase Twitter for $44 billion.

At the time his net worth was close to $200 billion—with the bulk of his wealth coming from his ownership in Tesla’s stock.

He could have sold his Tesla stock to come up with the $44 billion.

But in order to do that he would have to sell $70 billion worth of the stock, and pay almost $26 billion in taxes just to get the $44 billion in after-tax income to purchase Twitter.

And Elon didn’t want to do that.

Table 2: Paying Capital Gains Taxes on Selling

In order to afford the $44 billion purchase price, Elon would have had to sell $70 billion of Tesla shares. He also would have lost out on the future appreciation of those Tesla shares.

Not only because he would have to pay $26 billion in taxes.

But also because selling would mean that he would lose out on the future growth of those Tesla shares.

What if the $70 billion those Tesla shares were worth in 2022 grew to $100 billion, $300 billion or more?

By selling those shares back in 2022 he would have lost out on that future growth.

But what if there was a way for Elon to have his cake and eat it too?

If he could keep his Tesla shares, AND purchase Twitter, AND not pay any taxes for doing so, AND receive a tax-deduction on top of this?

Well there was/is.

And that was for Elon to borrow cash against his Tesla shares to purchase Twitter instead of selling Tesla shares outright.

That way he gets to keep the Tesla shares while also receiving tax-free income AND a tax-deduction if he wants to sell Tesla shares in the future tax-free. AND he doesn’t have to pay any of the loan or interest back until he dies or sells the Tesla shares (whichever comes first).

Let’s look at how this materializes.

How Elon Can Use the Accrued Interest on His Loan to Deduct Against Future Gains—Even Though He Never Paid Back the Interest in Cash

Let’s assume that back in October of 2022, Elon Musk had $200 billion of Tesla shares.

He borrows $44 billion in cash against it.

That means he’s borrowing 22% of the value of his Tesla shares (a 22% loan-to-value (LTV) ratio) to purchase Twitter.

Table 3: Keeping Your Loan-To-Value Low

Elon Musk borrowed $44 billion against his $200 billion Tesla portfolio in order to purchase Twitter which was only 22% of his overall Tesla portfolio. As long as he keeps this loan-to-value ratio below 75%-85%, he will never have to pay the loan back until death.

At today’s interest rates he would be borrowing at ~4.5%.

But to keep the math simple, let’s assume he borrowed the $44 billion at 5%.

That means he’s accruing $2.2 billion+ in interest charges each year as the loan (and his interest charges) grow.

But here’s the kicker; he doesn’t actually have to pay any of the $2.2 billion+ in interest—or  the $44 billion in principal—back at the end of the year.

The loan he took is a securities-based loan—not a mortgage loan.

With a mortgage loan you have to pay back the principal and interest every month.

With a securities based loan, you don’t have to pay back the interest or principal as long as your loan-to-value (LTV) is less than 75%-85% of your portfolio value.

The loan is only paid back when you die or when you sell off a large enough amount of your portfolio such that the LTV exceeds the 75%-85% limit.

Since Elon’s initial borrow amount was so low, it’s likely that he will never have to pay back this loan until he dies.

On top of that, if Elon used a box-spread loan against his portfolio he gets an interest deduction every year for the interest he is accruing on the loan—even though he is actually not paying the interest back.

This is because a box-spread loan is technically a Section 1256 contract which allows you to take the interest deduction—EVEN THOUGH HE DIDN’T ACTUALLY PAY THE INTEREST BACK

Section 1256 contracts are mark to market which means that the interest that is accrued is considered a deductible loss—even if you don’t pay the interest back in cash. This is fundamentally different than a mortgage loan where not only do you have to pay the interest back to get the deduction, but the interest deduction is capped to the first $750,000 of your mortgage.

With a box-spread loan there is no $750,000 limitation on the loan principal.

No matter what the amount of the loan is, the interest is deductible.

The other great advantage of a box-spread loan is that you don’t have to itemize your deductions on your tax-return like you do when you deduct your mortgage interest.

In other words, when you deduct your mortgage interest you lose out on the $32,200 standard deduction for married families.

Either you take the standard deduction or you itemize and deduct your mortgage interest (up to the $750,000 loan limit).

So deducting your mortgage interest isn’t really valuable unless the deductible mortgage interest is greater than the $32,200 standard deduction.

Given the $750,000 loan balance limit we can see how this is a problem.

If the maximum loan interest I can deduct is based on a $750,000 loan balance, at a 6% mortgage rate, that means the maximum I can deduct here is $45,000 (6%*$750,000). As the interest rate or loan balance goes down, the value of the mortgage interest deduction goes down as well.

So unless I have other deductions here to make (State and local income taxes, property taxes, charitable deductions, etc), the value of the mortgage interest deduction is only marginally valuable.

But with using a box spread loan, you get to keep the $32,200 standard deduction AND deduct the mark-to-market interest from the box spread loan—even though you never actually paid the interest back in cash.

On top of that, borrowing interest rates for box-spread loans are lower than traditional 30 year mortgage rates (currently ~4.5% for box-spread loans vs 6%+ for mortgage rates).

The catch here is that with box-spread loans you can only lock in the interest rates for up to 5 years after which it becomes a variable rate (that you can then lock up for another 5 years).

If you’re familiar with the Mortgage industry you can think of this kind of like a 5 year Adjustable Rate Mortgage (ARM) where you lock in rates for the first 5 years and then after that 5 year period is up, you can choose to lock in rates for another 1 year period or 5 year period.

The table below summarizes the pros and cons of borrowing against your home to make a purchase versus borrowing against your portfolio.

Table 4: The Benefits of a Box-Spread Loan Over a Traditional Mortgage

Explaining the Math Now let’s take a look at Elon’s net gain here.

In October of 2022 he could have sold $70 billion worth of his Tesla shares, paid $26 billion in federal and state taxes and used the remaining $44 billion to purchase Twitter.

But then he would have lost out on the future appreciation of Tesla.

As of August 2026, those $70 billion in Tesla shares are now worth $112 billion—which is $112 billion of value that Elon wouldn’t have had if he sold those shares to begin with.

Now we have to account for the fact that even though Elon kept his Tesla shares, he also borrowed $44 billion against it which at 5% interest means he has an outstanding $53.5 billion dollar loan.

But even after accounting for the $53.5 billion loan, Elon still has a net $58.5 billion in value ($112 billion of shares minus outstanding $53.5 billion loan) that he wouldn’t have had otherwise if he had just sold the Tesla shares to begin with.

Table 5: The Benefits of a Box-Spread Loan Over a Traditional Mortgage

Elon Musk borrowed $44 billion against his $200 billion Tesla portfolio in order to purchase Twitter which was only 22% of his overall Tesla portfolio. As long as he keeps this loan-to-value ratio below 75%-85%, he will never have to pay the loan back until death. Borrowing against his portfolio allowed Elon to benefit from the $58.5 billion in appreciated net value of the Tesla shares that he wouldn’t have had if he simply sold the shares to begin with

While the loan has grown to $53.5 billion from the $44 billion he originally borrowed, it’s important to remember that the extra $9.5 billion in loan interest is fully deductible against future capital gains sales that Elon makes—even though Elon never actually paid the interest.

Using the Interest Deduction to Offset Future Capital Gains

Now as we mentioned above, Elon Musk accumulated $9.5 billion interest deductions that he can use to offset the future gains.

How can he use this?

Let’s say Elon is a little worried that so much of his wealth is concentrated in Tesla and he decides he wants to sell $9.5 billion of his Tesla shares.

Well because he accumulated $9.5 billion in interest deductions, he can sell those $9.5 billion in Tesla shares with no taxable gain and with no taxes owed.

Table 6: Using Box-Spread Loan Interest to Offset Capital Gains

Borrowing $44B gave Elon Tesla $9.5 billion worth of deductible interest. He can use this deductible interest to sell $9.5 billion worth of taxable Tesla shares and pay no taxes on that gain.

He can then use that $9.5 billion to purchase a diversified portfolio that doesn’t consist of just one stock.

And this is all possible because of a loan he took to purchase another asset (Twitter) which allowed him to keep his previous asset (Tesla) while benefitting from the future appreciation of both.

How Can I Benefit From This? Hopefully you read all of this and are thinking to yourself, “Can I do something similar?”

And the answer is you can.

Here are financial planning situations where you can use a box-spread loan to reduce the drag of taxes on your financial planning goals:

• Placing a downpayment for a home without having to sell off your stock portfolio to do so and losing out on future gains
• Taking out a loan against your portfolio instead of a mortgage to acquire a home or rental property to benefit from lower interest rates with more tax-deductibility
• Taking tax-free income from your portfolio in retirement and reducing IRMAA charges
• Selling a concentrated stock position without paying taxes
• Selling a business or home and offsetting the capital gains taxes with deductions from the loan interest