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LostInParadise's avatar

Would it be fair to have a tax on unrealized capital gains?

Asked by LostInParadise (30052points) December 15th, 2021

An unrealized capital gain is an increase in the value of stocks that have not been sold. I am in favor of progressive taxes, but a tax on unrealized capital gains does not seem right. Biden has proposed such a tax, which would initially affect only the wealthiest Americans. The only argument that I can think of in its favor is if stock certificates were used to pay for things, which I have never heard of being done.

Imagine this scenario. In order to pay for a tax on unrealized gains, a person sells a portion of their stock, which increases their tax, because there is now a higher tax on realized capital gains. What a mess!

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26 Answers

elbanditoroso's avatar

No, for the very reason you have listed. If the gains are not realized, you don’t have the cash to pay the taxes. This is an astonishingly stupid proposal.

flutherother's avatar

The income of the wealthiest Americans comes from stocks and shares rather than salaries. I think it is only fair to find some means of taxing that. It isn’t fair that poorer Americans, who sometimes work two or three jobs to survive, give their country a much higher proportion of their income than the wealthiest, who may not work at all.

janbb's avatar

@flutherother But they are taxed on what they realize which is their actual income.

Forever_Free's avatar

No. There is no loss until you cash out. That is like saying to tax you on something you never owned.

elbanditoroso's avatar

Another problem with taxing unrealized capital gains is how they would handle the situation when the value goes down.


I buy a stock at $50/share. I hold on to it for 10 years, and at the end of 10 years it is worth $1000/share.

Am I taxed at that point? I haven’t sold it.

Then that stock, which was in the buggy whip business, tanks and goes down to $10/share because there is no further demand for buggy whips.

So I sell it at $10/share.

do I get a refund for the taxes I paid for the unrealized gain, since that gain no longer exists?

Talk about opening a can of worms!

gorillapaws's avatar

What the 1% of the 1% are doing is borrowing against those unrealized gains and living off of the loans. They never pay the loans off. Then at death, there is an inheritance loophole. The gains aren’t taxed then either and the inheritors can resolve the debt, pay no tax and then repeat the cycle for the next generation. See “Buy, Borrow, Die.”

A progressive wealth tax would certainly help with this, as well as proper estate tax laws.

zenvelo's avatar

I get what a lot of people are saying here. But if you have unrealized capital gains that are passed to heirs, the estate should be taxed on the basis of the point where the asset was acquired, not at the time of transfer of ownership.

Bill Gates got a lot of Microsoft stock for almost nothing in terms of basis. When his kids inherit, the estate should pay taxes on the realized gains of the current value.

Also, one should not be permitted to use assets that include unrealized capital gains as collateral for a “loan”.

And, capital gains should not get preferential tax treatment. Treat capital gains as income and tax at the same marginal rate as regular income.

filmfann's avatar

This is why the super-rich don’t pay taxes. Something must be done!
I have not looked at Biden’s plan, but if it starts at, say, $5 million dollars in unrealized gains each year, and then taxes at no less than 10%, the government could pay for a lot of programs.

KRD's avatar

I agree with @filmfann.

Smashley's avatar

It’s basically a subsidy on investment and speculation, and also a major tax loophole for the super rich. I say tax it moderately to keep speculation down.

rebbel's avatar

How about this: anything over, say, 10 billion, you can keep half of, and gift the other half away, to charity (around the world)?

LostInParadise's avatar

There should definitely be reform of inheritance taxes, what conservatives call death taxes. And the tax on realized capital gains should be increased. I still do not see the merit of a tax on unrealized capital gains.

elbanditoroso's avatar

@rebbel Charity should be voluntary, not forced.

rebbel's avatar

@elbanditoroso I get that, obviously.
In my proposition it isn’t though.
They have already so much money, that by now nothing other than gifting half of what they make extra may be expected.
It’s voluntary to choose the charity though (they can also pay for infrastructure fixes, or buying vaccins for the developing nations).

Forever_Free's avatar

Sadly there are many flaws in this thinking. It negatively affected the firms desire to succeed.
It is important to remember that corporate taxes must be paid by people. Any tax increase will be paid by either shareholders/owners, employees in the form of lower wages, or customers in the form of higher prices.

Jaxk's avatar

Un-realized means you haven’t got the money. If you don’t have the money why would you be taxed on it. They already do this with ‘stock options’. We had stock options in a company where my wife worked. She had the options for several years but eventually quit and we exerized the options. The way it works is that you pay for the options and you pay tax on the difference between what you payed and current market value. The next year the company went bankrupt and the stock went to zero. So We lost our investment and we lost the tax we paid. We did get a capital gains loss on the investment but no write off for the taxes we paid on money we never saw.Beware that when government starts this sort of crap it will eventually come down on the average household. If you have a 401K, can you be taxed onm every move the market makes. If you buy stock and it goes up, you get taxed. Then when it goes down you don’t get a refund but if it goes back up again the next year, bang you get hit again. Hell the market goes up and down all the time. How many times can you get hit for taxes on profits you never saw. Bad idea

zenvelo's avatar

@rebbel Anything over 1 billion, not 10 billion. No one can morally justify having more than 1 billion dollars in assets.

elbanditoroso's avatar

Wow, we have veered way off course here.

It is your place (or mine, or anyone else’s) to define what someone else’s morality should be? That approach is a very scary thing.

JLeslie's avatar

I’m not on board with taxing unrealized gains. I’m also not on board with a “wealth tax.”

I am in favor of a progressive tax. I’m in favor of getting rid of a lot of loopholes.

Get rid of the 1031 exchange.

Lower the federal estate tax exemption to $2,000,000 and have a progressive tax on estates.

Stop raising the gift tax exemption. Giving away money tax free in huge amounts avoids taxes and also allows for working the system to receive Medicaid and SNAP and other services.

Take a look at the variety of financial vehicles to “evade” taxes. This is tricky though, because helping people save means less likelihood they wind up needing government help. The thing is the average lower middle class or middle class oerson doesn’t get to take advantage of all the ways to dodge taxation.

Take another look at how ACA evaluates income. People can have $5 million in wealth and still get a subsidy for healthcare. The entire healthcare system needs an overhaul.

JLeslie's avatar

Oh, and I think SEP IRA limits are now around $60,000! That’s huge. Someone who makes $250,000 self employed or business owner can sock away $60,000 (math is not exact) and reduce their taxable income to $190,000, and most likely are already reducing income by expensing a lot of things on their business. I want to help small businesses owners, but some of the limits are crazy high in my opinion.

Caravanfan's avatar

I do not agree on a tax on unrealized capital gains. I can not imagine that getting through Congress.

gondwanalon's avatar

This is a bizarre effort to strip money from hard working people who make smart decisions in life by investing in the stock market.

I heard one liberal justify a non realized capital gains tax by saying property is commonly taxed at an unrealized amount of money. The problem with that logic is that you are realizing the value of the property by using it or living there. Therefore there’s no comparison whatsoever.

Don’t buy the idea that this tax is for only the very wealthy because the liberal leadership in Congress will be soon coming for the middle class next.

Smashley's avatar

@gondwanalon The core of this issue, it seems, is that the super wealthy do realize the value of their unrealized gains by borrowing against them as a source of income. Not only are these gains tax free, the loan interest is often subsidized.

And there is no attempt to “strip” anyone of anything they deserve. Not taxing unrealized gains is a market distorting, subsidy, and people are only discussing turning off the free money hose.

But agreed that the Democrats are coming for the middle class, but that’s only because they are as captured and as unable to make the rich pay as Republicans are

kritiper's avatar

Yes. I make estimated tax payments all year long. If I make more than my estimate, I pay taxes on the entire amount I earn for the year. Why shouldn’t someone else??

gondwanalon's avatar

@Smashley I’m far from the super wealthy. But I’ve done well in the stock market. It’s not a big stretch to see that it’s very likely that after the Congress uses this dreadful tax to milk the “super wealthy” that they will be coming after the middle class investors like me.

@kritiper I’m retired and still in the 24% Federal tax bracket and pay estimate taxes every 3 months plus another big pile of money at the end of the year. I also have a large nest egg in the stock market. Been really enjoying the lengthy bull market. I’ve been investing in the stock market for the last 35 years. I stayed the course and also dollar cost averaged through all the crashes and bubbles. I like it whenever the stock market went down as I saw it as a good money making opportunity.

So this non realized capital gains tax is designed to capitalize on my good choices. Capitalize on the risks that I took. Capitalize on my nest egg and jeopardize security.

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