Tax-aware borrowing strategies let you raise cash from a portfolio without selling the underlying assets, which keeps you out of the federal capital gains tax that runs as high as 23.8% on appreciated holdings. Long-term capital gains rates for 2026 are 0%, 15%, or 20% depending on taxable income, and high earners owe an additional 3.8% net investment income tax on top.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses2Office of the Law Revision Counsel. 26 USC 1411 – Net Investment Income Tax Pledging the same assets as collateral for a loan produces cash now, defers the tax indefinitely, and lets the portfolio keep compounding.
Why Borrowing Can Beat Selling
The 15% long-term rate begins above roughly $49,450 in taxable income for single filers and $98,900 for joint filers in 2026; the 20% rate takes over above about $545,500 single or $613,700 joint.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses Collectibles and certain small-business stock can be taxed as high as 28%. A high-income investor selling appreciated stock can face a combined 23.8% federal bill before a state tax is added.
Borrowing the equivalent dollar amount instead costs you interest, not tax. And the cost you don’t see on any statement is the return you would have kept earning on the shares you didn’t sell. A $500,000 position growing at 8% adds $40,000 in year one alone; selling it to raise cash forfeits that growth on top of the tax paid. Loan proceeds themselves are not taxable income because a loan is an obligation to repay, not a gain.
Methods of Tax-Aware Borrowing
Securities-Based Line of Credit
A securities-based line of credit (SBLOC) is secured by a non-retirement brokerage account. Lenders generally allow borrowing of 50% to 95% of the account’s value, with the percentage depending on the mix of holdings.3Investor.gov. Investor Alert: Securities-Backed Lines of Credit A diversified account of blue-chip stocks and bonds qualifies for a higher advance rate than one concentrated in a single volatile name.
Rates are variable, usually tied to a benchmark like SOFR plus a spread that narrows as the balance grows. As of early 2026, annual rates at major brokerages run roughly 6% to 8% on balances between $100,000 and $2.5 million or more, and they can change daily without advance notice.3Investor.gov. Investor Alert: Securities-Backed Lines of Credit
SBLOCs are demand loans. The lender can call the full balance at any time, for any reason, and liquidate securities if you cannot pay. Because the collateral is pledged, moving the account to another brokerage typically requires paying the loan off first.
Margin Loan
Margin is built into a brokerage account and is most often used to buy more securities, though the proceeds can cover cash needs too. Federal Reserve Regulation T allows initial borrowing of up to 50% of the purchase price of eligible securities.4Securities and Exchange Commission. Understanding Margin Accounts FINRA rules then require you to keep equity of at least 25% of the account’s market value, and many brokerages set a higher minimum.5FINRA. FINRA Rule 4210 – Margin Requirements
Drop below the maintenance level and you get a margin call demanding cash or securities within a few days. Miss it and the broker sells your positions without your input on which ones or when.6FINRA. Margin Regulation Interest accrues daily, bills monthly, and floats with rates.
401(k) Loan
If your employer’s plan permits it, you can borrow the lesser of $50,000 or 50% of your vested balance, repaying within five years with payments at least quarterly.7Internal Revenue Service. Retirement Topics – Loans Because this is a loan rather than a distribution, it avoids the 10% early withdrawal penalty and current income tax. Interest you pay lands back in your own account.
The $50,000 cap is reduced by the highest outstanding loan balance you carried during the prior 12 months, so paying off a loan does not immediately reset the ceiling.8Internal Revenue Service. Issue Snapshot – Borrowing Limits for Participants With Multiple Plan Loans And while borrowed money sits outside the account, it is not invested, which is a real cost that compounds over the term.
Life Insurance Policy Loan
Permanent life insurance (whole life, universal life) accumulates cash value you can borrow against with no credit check and no fixed repayment schedule. The loan is secured by the policy itself. You can repay on your own terms, or never during your lifetime.
Any unpaid balance and accrued interest reduce the death benefit. If the policy lapses or is surrendered with a loan outstanding, the portion of the loan exceeding the total premiums you paid becomes taxable income. After decades of cash-value growth, that surprise bill can be large. Policy loan rates are typically fixed in the contract and often run higher than a well-collateralized SBLOC.
What You Can Do With the Money, and Whether the Interest Is Deductible
Federal Reserve Regulation U treats SBLOCs as non-purpose loans, which means you cannot use the proceeds to buy or carry margin stock.9eCFR. 12 CFR Part 221 – Credit by Banks for the Purpose of Purchasing or Carrying Margin Stock (Regulation U) The lender will require you to certify that at closing. Margin loans, by contrast, are designed for securities purchases and fall under a different regulatory regime.
For tax purposes, the IRS tracing rules classify interest based on what the borrowed money bought, not what secured the loan.10eCFR. 26 CFR 1.163-8T – Allocation of Interest Expense Among Expenditures Pledge stock and spend the cash on a home renovation, and it is personal interest, which is not deductible. Use the same loan to buy taxable investments, and it becomes investment interest.
Investment interest is deductible under IRC Section 163(d), but only up to your net investment income for the year.11Office of the Law Revision Counsel. 26 USC 163 – Interest Net investment income includes taxable interest, non-qualified dividends, short-term capital gains, and royalties. You can elect to include qualified dividends and long-term capital gains, but doing so pushes those amounts into ordinary income rates rather than the preferential capital gains rates, so the election only helps in specific situations.
Interest you cannot deduct in the current year carries forward indefinitely.11Office of the Law Revision Counsel. 26 USC 163 – Interest The deduction is claimed on Form 4952 with your return.12Internal Revenue Service. About Form 4952, Investment Interest Expense Deduction Records matter here. If you commingle borrowed dollars with your own, you need to document exactly which dollars paid for which expenditure. Treating personal interest as investment interest can trigger a 20% accuracy-related penalty on the resulting underpayment.13Internal Revenue Service. Accuracy-Related Penalty
The Risks You Are Taking On
Forced Liquidation in a Downturn
The largest risk in any securities-backed loan is a market drop that pushes your account below the required collateral level. You get a maintenance call, typically with two or three days to deposit cash, add securities, or accept forced sales.3Investor.gov. Investor Alert: Securities-Backed Lines of Credit For a concentrated portfolio, that can happen overnight.
A forced sale creates the tax event you borrowed to avoid. You realize gains on whatever the lender chooses to liquidate, with no control over the timing or the tax lots. The practical defense is borrowing well under your approved limit. Someone drawing 20% to 30% of portfolio value has room to absorb a serious decline; someone at 70% does not.
Variable Interest Rates
SBLOC and margin rates float with market benchmarks. A rate that looks manageable at origination can rise sharply if the Fed tightens or credit spreads widen. These loans generally have no fixed term, so there is no natural exit if the cost keeps climbing, and lenders can adjust their spread with limited notice.
When the Cost of the Loan Exceeds the Tax You Are Deferring
Tax-aware borrowing only works when the interest rate is lower than the tax rate you avoid. If your long-term capital gains rate is 0%, there is no tax to defer. Even for higher-bracket investors, paying 7% a year to defer a one-time 23.8% capital gains hit only pays off if the borrowed-against assets grow faster than the interest accrues. Run the numbers before assuming that borrowing beats selling in every case.
The Buy-Borrow-Die Endgame
The most aggressive use of these strategies is sometimes called “buy, borrow, die”: buy appreciating assets, borrow against them for spending money instead of selling, and hold until death. Under 26 USC 1014, property passing at death gets a new basis equal to its fair market value on the date of death.14Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent The lifetime appreciation is wiped from the tax ledger.
Heirs can then sell at the stepped-up basis with little or no capital gains tax and use the proceeds to pay off the loans. The borrower spent tax-free loan money during life; the gains were never taxed by anyone. The strategy assumes an estate large enough that the borrower does not need to touch principal, and it depends on after-tax portfolio growth staying ahead of borrowing costs over decades. A severe drawdown at the wrong time can still force liquidation.
What Happens to a 401(k) Loan When You Leave the Job
This is where 401(k) borrowers get caught. Many plans require full repayment of any outstanding balance on separation, whether you quit, are laid off, or retire. If you cannot pay, the plan treats the balance as a distribution, issues a Form 1099-R, and you owe income tax on the whole amount.7Internal Revenue Service. Retirement Topics – Loans Under age 59½, the 10% early distribution penalty stacks on top.
There is a way out. When the plan offsets your account balance against the unpaid loan (a plan loan offset), the distribution is generally eligible for rollover to an IRA. If the offset resulted from separation from the employer, you have until your tax filing deadline for that year, including extensions, to complete the rollover.15Internal Revenue Service. Plan Loan Offsets Doing so wipes out both the income tax and the penalty. The hurdle is coming up with the cash, since the money that would have funded the rollover already went to satisfy the loan.