Scenario: you have equity worth (say) $100 million in expectation, but of no realized value at the moment.
You are forced to pay unrealized gains tax on that amount, and so are now $25 million in the hole. Even if you avoid this crashing you immediately (such as by getting a loan), if your equity goes to $0 you’re still out for the $25 million you paid, with no assets to back it.
The fact that this could be counted as a prepayment for a hypothetical later unrealized gain doesn’t help you, you can’t actually get your money back.
But the OP explicitly said (as quoted in the parent) that the proposal allows for refunds if the basis is not (fully) realized, which would cover the situation you’re describing.
That makes the situation better, but there’s still some issue. The refund is not earning interest, but you liabilities are.
Take the situation with owing $25 million. Say that there’s a one year time between the tax being assessed and your asset going to $0 (at which time you claim the refund). In this time the $25 million loan you took is accruing interest. Let’s say it does so at a 4% rate per year, when you get your $25 million refund you therefore have $26 million in loans.
So you still end up $1 million in debt due to “gains” that you were never able to realize.
That’d be a problem indeed, but only because the contract you’re proposing is suboptimal. Given that the principal is fully guaranteed, it shouldn’t be terribly difficult for you to borrow at >4% yearly with a contingency clause that you don’t pay interest if the asset goes to ~0.
Scenario: you have equity worth (say) $100 million in expectation, but of no realized value at the moment.
You are forced to pay unrealized gains tax on that amount, and so are now $25 million in the hole. Even if you avoid this crashing you immediately (such as by getting a loan), if your equity goes to $0 you’re still out for the $25 million you paid, with no assets to back it.
The fact that this could be counted as a prepayment for a hypothetical later unrealized gain doesn’t help you, you can’t actually get your money back.
But the OP explicitly said (as quoted in the parent) that the proposal allows for refunds if the basis is not (fully) realized, which would cover the situation you’re describing.
Somehow I missed that bit.
That makes the situation better, but there’s still some issue. The refund is not earning interest, but you liabilities are.
Take the situation with owing $25 million. Say that there’s a one year time between the tax being assessed and your asset going to $0 (at which time you claim the refund). In this time the $25 million loan you took is accruing interest. Let’s say it does so at a 4% rate per year, when you get your $25 million refund you therefore have $26 million in loans.
So you still end up $1 million in debt due to “gains” that you were never able to realize.
That’d be a problem indeed, but only because the contract you’re proposing is suboptimal. Given that the principal is fully guaranteed, it shouldn’t be terribly difficult for you to borrow at >4% yearly with a contingency clause that you don’t pay interest if the asset goes to ~0.