The Art of the Loss: How did Trump avoid income tax for 18 years?

October 9, 2016. Second presidential debate, a town hall in St. Louis. A week earlier, someone had mailed three pages of Donald Trump's 1995 tax returns to a New York Times reporter. Anderson Cooper asks the question directly:

Most of the country heard a scandal. Tax people heard something else: a man describing, accurately, how the tax code works.

The Number

The leaked pages showed a declared loss of $915,729,293.

The number was so large it broke the tax software. His accountant's program couldn't fit nine digits in the box, so the first two, the "91," were typed in separately on a typewriter, slightly out of alignment.

That figure is a net operating loss, an NOL. When a business loses more in a year than its owner earns from everything else, the tax code doesn't let the extra go to waste. The unused loss travels to other years, canceling income dollar for dollar wherever it lands.

Under the rules in 1995, an NOL could reach back 3 years for refunds of taxes already paid, then forward 15 more. Eighteen years of runway.

A loss that size isn't a wound. It's an asset, one that could have zeroed out every dollar Trump earned from The Apprentice, book deals, and licensing well into the 2000s.

The Wreckage

Buy an empire with borrowed money, at the top of the market, right before a recession.

Between 1988 and 1990, Trump bought the Plaza Hotel for about $400 million, an airline for about $365 million, and opened the Taj Mahal casino, a billion-dollar project financed largely with junk bonds paying 14% interest. By 1992, the airline was gone, and the Plaza and the casinos had been through bankruptcy.

Real losses. But the tax loss was bigger than the money Trump personally lost. Two machines did the work: one built into the code, one his own lawyers wouldn't touch.

The Paper Loss

The tax code assumes buildings wear out, so it lets owners deduct a slice of a building's cost every year as depreciation, even in years the building goes up in value.

Now add leverage. Buy a tower with 20% down and the bank's 80%, and you still deduct depreciation on 100% of the building. Tenants service the loan, the asset appreciates, and the tax return shows a loss. A real-estate developer can be cash-rich and paper-poor for decades. That's not a loophole; it's the design.

In 2019, the Times obtained tax transcripts covering 1985 through 1994: $1.17 billion in reported losses over the decade, more than almost any other individual American taxpayer. He paid no federal income tax in 8 of those 10 years, including years he was flying between his properties by helicopter.

The Dodge

Most of the money lost in the collapse was the lenders' money. When Trump couldn't repay, the banks and bondholders forgave hundreds of millions of dollars of debt.

The tax code has a rule for that: canceled debt is income. Borrow $100 million, repay nothing, and you're $100 million richer. The IRS taxes it like earnings. Forgiven debt should have wiped out a huge share of Trump's losses.

It didn't. His advisers used a maneuver called an equity-for-debt swap: instead of "forgiving" the debt, bondholders traded it for ownership stakes in the casinos, paper in businesses that had just been through bankruptcy. Structured that way, no canceled-debt income hit the return, and the losses stayed intact.

His own lawyers wouldn't stand behind it. They refused to issue an opinion that the position was more likely than not to survive an IRS challenge, the ordinary comfort letter for an aggressive position. Trump did it anyway, and the IRS never undid it. Congress closed the maneuver for corporations in 1993 and for partnerships in 2004. Among the senators voting to close it: Hillary Clinton.

The Spend

Once the $916 million was on the books, no cleverness was required. Year after year, income from television, licensing, and endorsements arrived, and the old loss was waiting.

The machine never really stopped. In 2020, the Times obtained his more recent returns: $750 in federal income tax in 2016. Another $750 in 2017. No federal income tax at all in 10 of the previous 15 years, mostly because of reported losses.

Congress has since narrowed the rules. Losses born after 2017 can't be carried back, they cancel at most 80% of a future year's income, and there's a yearly cap on how much business loss an individual can claim against wages and investment income. But the heart of it survives. An NOL now carries forward forever.

The Move

You don't have casinos. But the principle on those three leaked pages works at any scale: a realized loss is an asset with a memory. The tax code lets losses wait, years if they have to, for income worth canceling.

The household version is the loss bank: harvested capital losses carry forward indefinitely, ready for the year a tender offer or a concentrated stock sale finally lands. In that letter, an engineer named Priya erases a $240,000 gain with $240,000 of quietly banked losses, the same move as Trump's $916 million: smaller, slower, and entirely respectable.

If you own a business, NOLs are still real, still legal, and still carried forward. And if you own rental property, depreciation remains a wonderful charge.

What you can't do is the dodge. Deducting losses funded by someone else's money, then skipping the tax when the debt disappeared, required a loophole Congress shut two decades ago, and lawyers willing to look away.

The loss was real. The genius, such as it was, wasn't losing the money.

It was making sure the tax code remembered.