The Richest People Pay the Lowest Tax Rates
In 2021, ProPublica published leaked IRS data showing that Jeff Bezos paid $0 in federal income taxes in 2007 and 2011, and Elon Musk paid $0 in 2018. These were not accounting errors or fraud—they were the result of a legal strategy.
Understanding how they do it teaches something fundamental about how wealth and taxation work.
How Wealth Grows Without Income
Billionaires hold most of their wealth in assets—primarily company stock. When that stock appreciates in value, it creates wealth. However, capital gains are only considered "realized"—and thereby subject to taxation—when an asset is sold for a profit [7]. Unrealized capital gains (appreciation in value that hasn't been "realized" through a sale) are not taxable income under current US law [1], [3].
Bezos did not earn a billion-dollar salary; rather, Amazon's stock price increased. Because he did not sell his shares, no taxable event occurred [1], [6].
The "Buy, Borrow, Die" Strategy
Here is how the ultra-wealthy turn growing (but untaxed) asset wealth into spending money:
Step 1 - Buy: Acquire assets (stock, real estate) that appreciate in value [3].
Step 2 - Borrow: Use those appreciated assets as collateral for low-interest loans from banks. The loan is not income—it is debt—and is not taxable [8].
Step 3 - Live on the Loan: Use the borrowed cash for expenses. Pay interest on the loan, which is often significantly lower than the asset's growth rate.
The result: You live on borrowed money while your assets grow. You never sell, so you never trigger capital gains taxes [3], [7].
Step 4 - Die: When you die, your heirs receive your assets with a "stepped-up basis" [1]. This provision adjusts the cost basis of an inherited asset to its fair market value at the time of the owner's death [1], [2]. Consequently, any appreciation that occurred during the original owner's lifetime is never subject to capital gains tax [1], [3].
A Simplified Example
You own $100M in stock. You need $5M to live this year.
Option A - Sell: Sell $5M of stock → Pay capital gains tax (up to 20% for long-term gains) [3], [4] → Take home less than $5M.
Option B - Borrow: Borrow $5M against the stock as collateral → Pay interest → The stock continues growing → No capital gains tax triggered [8].
Source: Finance4Everyone calculation using data from [3], [4], and [8].
Why This Is Legal
The US tax code taxes income and realized gains, not wealth accumulation or appreciation [3], [7]. Loans are not considered income under the Internal Revenue Code [8]. Using appreciated assets as collateral does not constitute a sale, meaning no capital gains tax is triggered [1], [7].
What This Means for Regular People
While the scale of billionaire borrowing is unique, the underlying principles of tax-efficient investing apply to everyone:
- Tax-advantaged accounts (Roth IRA): Growth in these accounts is not subject to capital gains tax [10].
- Hold assets long-term: Assets held for more than one year qualify for long-term capital gains tax rates, which are generally lower than ordinary income tax rates [6]. For tax year 2026, the rate on most net capital gains is no higher than 15% for most individuals [4].
- Avoid selling in high-income years: If you must sell assets, timing matters; selling in a year where your total taxable income is lower may result in a lower capital gains tax rate [4].
- The stepped-up basis rule affects estate planning: Understanding how assets are valued at death is a critical component of long-term estate planning [1], [7].
Key Takeaway: The wealthiest people in the world often utilize debt against assets to fund their lifestyles without triggering taxable events. Understanding the gap between how wealth grows (appreciation) and how the tax code operates (taxing realized income) is a fundamental piece of financial literacy.
