Billionaires do pay taxes, but the reason they often pay so little relative to their fortunes is that the U.S. tax code taxes income, not wealth. If you want to know why billionaires don’t pay taxes at rates that match their net worth growth, the short answer is that most of their wealth is unrealized stock appreciation the IRS never sees, and a stack of legal strategies keeps the income they do report remarkably small. A 2021 ProPublica analysis of leaked IRS records found that some of the wealthiest Americans paid effective rates in the low single digits when measured against the growth of their fortunes.
Wealth Is Not Income Under Federal Tax Law
Federal income tax applies to money you receive or realize in a given year: wages, interest, dividends, and profits from selling assets. It does not apply to the increase in value of things you own but haven’t sold. Buy stock for $1,000, watch it climb to $1 million, and you owe nothing until you sell.
Most billionaire fortunes are ownership stakes in companies. When a founder’s company doubles in stock price, their net worth doubles, but the IRS sees no taxable event. That unrealized appreciation is the engine of billionaire wealth, and it sits outside the income tax system for as long as the owner holds the shares. This is not a loophole hidden in fine print. The Internal Revenue Code defines gain as the difference between what you sell something for and what you paid for it, and it only taxes that gain when the sale happens.1Office of the Law Revision Counsel. 26 USC 1001 – Determination of Amount of and Recognition of Gain or Loss
Investment Income Gets a Lower Rate Than Wages
When billionaires do sell assets, they pay tax at a lower rate than most workers pay on salaries. For 2026, ordinary income from wages is taxed at progressive rates from 10% up to 37% for taxable income above $640,601.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Long-term capital gains, meaning profits on assets held longer than a year, top out at 20% for the highest earners.3Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed Qualified dividends get the same favorable treatment.
A Net Investment Income Tax adds 3.8% on top of capital gains rates for individuals with modified adjusted gross income above $200,000, or $250,000 for married couples filing jointly.4Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax That brings the real maximum rate on investment income to 23.8%, still well below the 37% top rate on wages.
A billionaire who sells $50 million in stock pays a lower percentage than a surgeon earning $700,000 in salary. Many wealthy founders lean into this by taking little or no salary, with compensation structured entirely around equity. Their financial lives happen in the capital gains world, not the payroll world.
Buy, Borrow, Die
If selling stock triggers a 23.8% tax bill, the obvious move is to never sell. But billionaires still need cash to buy houses, fund projects, and live on. The solution is to borrow against the stock instead.
Banks extend enormous lines of credit to anyone with a nine- or ten-figure portfolio as collateral. The interest rate on these securities-backed loans is often lower than the tax rate the borrower would face on a sale. A billionaire pledges $500 million in stock, borrows $100 million in cash, and spends it freely. The IRS doesn’t consider loan proceeds to be income, because the borrower has an equal obligation to repay, so there’s no net gain to tax. The result is spending power without a tax bill.
The strategy carries risk. If the pledged stock drops sharply, the lender can issue a margin call, forcing the borrower to post more collateral or sell shares. A forced sale triggers exactly the taxable event the borrower was trying to avoid. In practice, most billionaires hold diversified enough collateral that margin calls are rare, and banks work with their wealthiest clients rather than forcing fire sales.
The full power of this approach becomes clear when paired with the step-up in basis at death. If the borrower dies before repaying, the loan is paid from the estate, and the heirs inherit the stock at its current value with no capital gains tax on the lifetime appreciation. Wealth planners call this the “buy, borrow, die” cycle. It is arguably the single most effective legal tax-avoidance strategy available to the ultra-wealthy.
Business Losses and Depreciation Shrink Reported Income
Even when billionaires do report income, they have tools to shrink it on paper. The most powerful is the net operating loss deduction. If you own multiple businesses and one loses money, those losses offset profits from your other ventures. Losses that exceed current income can be carried forward to reduce taxes in future years.5Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
There are limits. Since the 2017 tax reform, net operating losses arising in years after 2017 can only offset up to 80% of taxable income in any given year.5Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction Congress also capped the amount of business losses individuals can use to offset non-business income under Section 461(l), with the threshold adjusted annually for inflation. These limits slow the strategy without stopping it.
Depreciation is the other major paper deduction. When you own physical assets like buildings, equipment, or machinery, the tax code lets you deduct a portion of their cost each year to reflect wear and tear.6Internal Revenue Service. Publication 946 (2025), How To Depreciate Property The deduction reduces reported income even when the property is actually appreciating. A billionaire who owns a $200 million real estate portfolio can claim millions in annual depreciation, making the investment look like a loss on paper while the properties grow more valuable. Cost segregation studies accelerate this by reclassifying building components into shorter recovery periods.
Donating Appreciated Stock Produces a Double Benefit
Donating assets instead of cash creates two tax benefits at once. When you donate stock that has gone up in value to a qualified charity, you skip the capital gains tax you’d owe on a sale, and you get to deduct the full current market value, not what you originally paid.7Internal Revenue Service. Publication 526 (2025), Charitable Contributions
Say a billionaire bought shares for $1 million that are now worth $50 million. Selling and donating the cash would mean paying roughly $11.6 million in capital gains and NIIT, leaving about $38.4 million for the charity. Donating the shares directly sends the full $50 million to the charity and produces a $50 million deduction, limited to 30% of the donor’s adjusted gross income for the year. Unused deductions can be carried forward for five years.7Internal Revenue Service. Publication 526 (2025), Charitable Contributions
Donor-advised funds make this easier. A donor contributes appreciated stock now, claims the deduction immediately, and decides later which specific charities receive grants from the fund. There is no deadline to distribute the money, so the tax benefit arrives years before the giving actually happens. A new 0.5% AGI floor on charitable deductions took effect for 2026 under the One, Big, Beautiful Bill Act, but for billionaires giving tens of millions, that floor barely registers.
Trusts Move Wealth Out of the Taxable Estate
Billionaires use specialized trust structures to transfer wealth to heirs while removing assets from their own taxable estates. Two of the most common are grantor retained annuity trusts and dynasty trusts.
A grantor retained annuity trust places assets into an irrevocable trust with the grantor retaining an annuity payment stream for a set term, often two years. The gift tax value is calculated using an IRS-prescribed interest rate. If the assets grow faster than that rate, the excess appreciation passes to beneficiaries at the end of the term with little or no gift tax. Families often structure these with an initial gift tax value of essentially zero. If the assets don’t outperform the hurdle rate, the grantor gets them back and tries again.
Dynasty trusts take a longer view. These irrevocable trusts hold assets for multiple generations, keeping them outside the taxable estate of every descendant along the way. In 2026, the generation-skipping transfer tax exemption matches the $15 million estate tax exemption.8Internal Revenue Service. What’s New – Estate and Gift Tax A married couple can fund a dynasty trust with up to $30 million that grows tax-free for grandchildren, great-grandchildren, and beyond. In states that allow perpetual trusts, this money can compound for centuries without facing estate or gift tax again.
The Step-Up in Basis at Death
This provision completes the cycle and makes borrowing against assets so effective. When someone dies, their heirs inherit assets with a cost basis reset to the fair market value on the date of death.9Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Consider a founder who bought shares for $100,000 that grew to $10 billion. Selling those shares would trigger roughly $2.38 billion in federal tax. If the founder never sells, borrows against the shares for spending money, and dies holding them, the heirs inherit with a new basis of $10 billion. The entire $9.9999 billion gain disappears from the tax system permanently. If the heirs sell the next day for $10 billion, they owe zero capital gains tax. This is why financial advisors tell wealthy clients to never sell highly appreciated assets during their lifetime if they can avoid it.
The Estate Tax Is a Weak Backstop
The estate tax is sometimes described as the backstop that catches untaxed wealth at death, but the exemption is high enough that it misses most fortunes entirely. For 2026, the basic exclusion amount is $15 million per individual, or $30 million for a married couple using portability.8Internal Revenue Service. What’s New – Estate and Gift Tax Only value above that threshold faces graduated rates topping out at 40%. The One, Big, Beautiful Bill Act, signed July 4, 2025, raised the exemption to this $15 million level from $13.99 million in 2025.
Wealthy individuals can also give up to $19,000 per recipient per year without any gift tax consequences or reduction of their lifetime exemption.8Internal Revenue Service. What’s New – Estate and Gift Tax A couple with three children and six grandchildren can transfer $342,000 every year through annual exclusion gifts alone, moving millions out of their taxable estate over a decade.
For billionaires with fortunes well above $30 million, the estate tax does apply to whatever remains in the taxable estate. But the trusts and gifting strategies above are designed to move as much value out of the estate as possible before death. When a founder funds a grantor retained annuity trust or dynasty trust with rapidly appreciating stock, all the future growth happens outside the estate. The estate tax ends up applying to a much smaller number than the person’s actual net worth.
How the Pieces Fit Together
None of these strategies exist in isolation. They work as a system. A billionaire founder holds stock that appreciates by billions (untaxed), borrows against it for spending money (untaxed), offsets any income that does appear with depreciation and business losses (reduced), donates appreciated shares to a donor-advised fund (deducted), transfers future growth into dynasty trusts (removed from estate), and eventually dies with a stepped-up basis that wipes out the remaining unrealized gains. Each piece is legal. The combined effect is that someone whose wealth grew by $5 billion over a decade might report only a few hundred million in taxable income during that period.
When ProPublica obtained years of IRS data on the wealthiest Americans in 2021, it calculated what it called “true tax rates” by measuring taxes paid against wealth growth rather than reported income. The figures for some of the best-known billionaires came in at the low single digits. That number is not directly comparable to the rate on your own tax return, because the denominator (total wealth growth) is not something the tax code recognizes as taxable. But it captures something real about how the system works in practice for people whose wealth is tied to asset appreciation rather than paychecks.