Unrealized Gains (UPDATED-some good news)

SURGEON GENERAL WARNING: Politics Are Not A Safe Alternative To Cigarettes.

If I told you that I was going to have you arrested for thinking about committing a crime, you would be outraged. It’s not a crime, until you do it.

If I told you that you owe sales tax for a car that you are test-driving, you would balk. How can you owe sales tax when a sale has not been made?

If I told you that you own income tax on some stock, or your home, or your mom’s heirloom bracelet, because it has doubled in value, and that is “income”, you would be shocked. How can you be charged income tax, when there was no income? You haven’t sold it.

But that is exactly the logic of this new budget proposal, which includes a plan to tax the ‘unrealized gains’ of the rich. In other words, if someone has stock that increased in value, but they haven’t sold it, then they have to pay tax on it anyway. Because it is worth more than it used to be worth. (I’ve heard no explanation of what happens if the stock price goes down again)

I have included references below because you will be reluctant to believe the government could be so crazy.

Two things need to be said.

1.This is NOT a GAIN, if you haven’t yet sold the asset. Assets go up, then down in value over time. In fact, this phrase is an oxymoron. It is akin to saying that someone is an unmurdered corpse, when they are clearly walking around. Or perhaps it is a dry, rain day. This is income tax on non-income.

2.This is not just a tax on the wealthy. It will start that way, but so did income tax. Surprised? Yes, income tax was introduced temporarily, and then permanently as a way to “tax the wealthy” [2]. Interesting way to phase it in, right?

But just as income taxes worked their way down to the middle class, so this law will too. The government is always hungry for more money. But tariffs and income tax and sales tax and estate tax should be enough.

This is a NEW TYPE of TAX. And it will become a regressive tax that will affect the middle class more than the rich. (Because it is your houses that are your largest asset, and often your largest retirement asset)

Why?

The rich will hire accountants and lawyers to advise them how to avoid this tax, and the quite obvious dodge is to put the stock into the ownership of an S-corporation, an LLC, or a trust, where it is no longer a personal asset and is no longer a target of this “income” tax. If Washington changes the law to target that, then the stock will move somewhere else, perhaps outside of the US. Recall that stocks are quite mobile.

“Oh, that’s not MY stock. It belongs to a non profit in Cayman.” I do have a controlling vote on the board of course. You want to tax a Cayman non-profit corporation? Crazy. Go for it. 

However, when this new type of tax makes its way down to the middle class (because the rich, will cleverly dodge it, just as they do income tax), you won’t have the money to hire tax lawyers and accountants to advise you about the yearly tax law changes. So you will likely be the one paying for this new money grab by the government.

Also, you can’t move your biggest asset that will gain unrealized value (your family home) outside of the US. At least, I don’t currently know how to do that.

So this is a dangerous idea. And quite possibly the funniest idea that I have heard from Washington in a long time. But even if it is an oxymoron, it is not a joke.

Hope.

There is probably no need to panic. Even if the executive branch floats crazy ideas like this in a proposed budget, and they did propose this [3], it is Congress who has to pass ideas into laws. So crazy ideas can be sidetracked by either the House of Representatives or the Senate. If it is too crazy, they can filibuster. This is the strength of our system, and is the reason that we don’t have too many crazy laws, even though we have no shortage of crazy politicians.

*** UPDATE: On Oct 26, I heard news that I consider reliable. Mark Cuban on Cavuto Live says this was a Biden idea, but Harris is NOT planning to institute this tax. Im also seeing this https://finance.yahoo.com/news/mark-cuban-breaks-silence-harris-131551439.html ***

References

[1] https://smartasset.com/taxes/unrealized-capital-gains-tax-policy

[2] https://www.pbs.org/newshour/economy/making-sense/the-income-tax-in-1913-a-way-to-soak-the-rich

images by AI at craiyon.com

[3] https://www.ramseysolutions.com/taxes/unrealized-capital-gains-tax