Unrealized Gains Tax

Author: Swagnarok

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#1
Swagnarok
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The Biden Administration and Congressional Dems are mulling a proposal to do the once unthinkable: tax gains from investments in securities (e.g. stocks) that haven't been cashed out yet. For example, if I purchased $50,000 in Bitcoin and then later the value my holdings has risen to $100,000, then that $50,000 "gain" would be liable to said tax even if, hypothetically, the value of said holdings were to crash the day after I paid taxes on it.

How do you think this would be implemented? Do you think it's a good idea in principle? In practice?
#2
Greyparrot
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Taxing unrealized gains is basically a liquidity problem for most investors. They probably will not have the cash on hand to pay the taxes if the gains are based on the appreciation of an asset rather than actual cash received. Since taxes can only be paid in cash, this will cause all sorts of problems. The value of many assets can be highly volatile, especially in the short term. Taxing unrealized gains could lead to situations where investors owe taxes on paper profits that may disappear right after the tax valuations if the market experiences a downturn. Taxing unrealized gains most definitely will discourage long-term investment strategies. Investors will be more inclined to engage in short-term trading to realize gains and pay taxes only on actual profits. Determining the accurate and fair market value of certain assets is highly subjective.(like Mar-A-Lago) Different valuation methods will lead to legal disputes between taxpayers and tax authorities, making the implementation and enforcement of such a tax complex and incredibly burdensome. Taxing unrealized gains will stifle innovation and investment if entrepreneurs and businesses are burdened with taxes on the paper gains of their investments before realizing actual profits. Implementing and administering a tax on unrealized capital gains would require a reliable and complex system to accurately track changes in asset values over time...reliable... This will certainly be a bureaucratic nightmare for tax authorities. Taxing unrealized gains will also affect most retirement savings accounts, such as 401(k)s and IRAs. Investors saving for retirement may face some serious BS if their portfolios are subject to taxation before they reach retirement age. Taxing unrealized gains is also a form of double taxation, especially when the actual gains are eventually taxed when the asset is sold. Taxing unrealized gains will impact an investor's ability to reinvest and contribute to economic growth. If a country implements a tax on unrealized gains and others do not, it could make the country less attractive to investors and businesses, potentially leading to capital flight, as nearly all investments will be safer overseas.










#3
ILikePie5
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@Swagnarok
As Greyparrot mentioned, liquidity becomes a major issue since the government wants cold hard cash. That liquidity create risk for investors, and thus, they demand higher returns. The volatility would increase significantly because of this. IRAs and 401ks are the great equalizer because of their tax exempt growth status. You take that away and they become meaningless. You could exempt them, but that still doesn’t combat the volatility problem which can lead to bad returns. It’s a bad idea plain and simple.
#4
cristo71
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@Swagnarok
Would unrealized losses then become tax deductible? In any case, it would change investor behavior for the worse. People think markets are volatile now? This would be nothing in comparison. Historically, government has tried to create incentives to reduce volatility and encourage long term holdings. This policy would erase that. Investors would sell in order to realize those taxable gains; they would sell to pay the taxes if not enough cash is on hand. I hope I don’t need to explain what happens to markets when there are more sellers than buyers.

It’s just an abysmal idea.
#5
Best.Korea
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"Every democrat idea is a bad idea. But my ideas are great." - republican

"I had 16% unemployment and shrinking GDP ☹😥" - also republican
#6
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@Best.Korea
"Never underestimate Joe's ability to F things up" - a Democrat president.
#7
Double_R
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@Swagnarok
Do you think it's a good idea in principle? In practice?
As far as I am aware, the proposal pertains only to estates. Currently there is a a write off referred to as the "stepped up basis". If I buy an empty lot for $100k and then sell it for $1 million, I have to pay a capital gains tax on that $900k profit. But if I die and my airs sell it for $1 million, they pay nothing. So my death essentially wipes out my tax liability.

I heard Biden talk about this while he was campaigning and I think that makes a lot of sense. If they're talking about doing it outside estates I'd have to look closer at it.
#8
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@Double_R
and my airs sell it for $1 million, they pay nothing
Cool, tell me how I can make one million income off a sale and not pay taxes on it.
#9
Greyparrot
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@Double_R
 So my death essentially wipes out my tax liability.
I take it you would support a federal inheritance tax?
#10
Double_R
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@Greyparrot
I take it you would support a federal inheritance tax?
Absolutely, I would tax the hell out of estates after about $10 million. It's insane that people who work for a living have to pay 20-25 percent of the income they worked for but people who literally did nothing can get millions handed down to them and pay nothing.

It also helps to ensure the meritocracy the political right loves to boast about.
#11
ILikePie5
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@Double_R
Absolutely, I would tax the hell out of estates after about $10 million. It's insane that people who work for a living have to pay 20-25 percent of the income they worked for but people who literally did nothing can get millions handed down to them and pay nothing.

It also helps to ensure the meritocracy the political right loves to boast about.
That’s actually where it is about right now. Something done by the Tax Cuts & Jobs Act. Glad we can agree on something.
#12
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Trump was the best Democrat the Republicans ever elected. 
#13
IwantRooseveltagain
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I take it you would support a federal inheritance tax?
You mean like the one that already exists?

#14
IwantRooseveltagain
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@ILikePie5
That’s actually where it is about right now. Something done by the Tax Cuts & Jobs Act. Glad we can agree on something.
It’s at 13.6 million now for each parent. So 2 parents can transfer 27 million to their child/children tax free. 

That is ridiculously high and was created by the Trump 2017 tax law.

#15
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@ILikePie5
Most people without money are clueless about the difference between an estate tax and an inheritance tax. If they did, trusts would be outlawed.