Plan to Institute 25% Tax on Unrealized Capital Gains

The Billionaire Minimum Income Tax Act was drafted in coordination with the White House to introduce the Biden/Harris unrealized capital gains tax plan as legislation. This bill imposes a minimum tax on individual taxpayers whose net worth for the taxable year exceeds $100 million. The tax is equal to 25% of the sum of a taxpayer's taxable income, plus net unrealized gains for the taxable year. The tax may not exceed 40% of the amount by which the taxpayer's net worth exceeds $100 million.

For a Unrealized Gains Tax:

Congressman Steve Cohen (D-TN): “The Billionaire Minimum Income Tax will ensure that the ultra-wealthy pay at least a base level of taxes every year, just like other Americans. The minimum tax would apply only to the extremely few households with a net worth over $100 million. The full 25 percent rate would only apply to those with net worth over $200 million. The bill would not raise taxes on ultra-wealthy households that already pay at least 25 percent on their full income, nor would it affect 99.99 percent of households with a net worth below $100 million. Our goal is tax fairness and it is immensely popular with the American public.”

Against a Unrealized Gains Tax:

House Ways and Means Committee: This is a tax on wealth you haven’t even earned yet. Democrats want to tax the “unrealized gains” of assets, a long-sought priority of progressives such as Senators Elizabeth Warren and Bernie Sanders. Under [Harris plan], Americans at the end of their careers – who have reached their highest earning level just before retirement – or those who have built up a business over a lifetime but not sold it, could be hit with a so-called wealth tax that would be an additional 25 percent on those assets. These are not the super-wealthy, but people who have worked a full lifetime and earned their retirement. Charging tax before an asset is sold runs counter to how income taxation works under our Constitution; the proposal would require Americans to declare to the IRS the value of their home, business, and personal assets on an annual basis to be levied a new tax bill.

Do you think there should be a tax on unrealized gains?

  -- A Deeper Dive --

A tax on unrealized gains refers to a proposed or theoretical tax that would be levied on the increase in value of an asset that an individual or entity holds, even if that asset has not been sold. Normally, capital gains taxes are only imposed when an asset is sold, and the gain (profit) is "realized." However, with a tax on unrealized gains, individuals would have to pay taxes on the increase in value of their assets each year, even if they haven't sold the asset to realize the gain.

For example, if you own stocks that have increased in value over the year but you haven't sold them, under a tax on unrealized gains, you would still owe taxes on the amount by which the value of the stocks has increased, even though you haven't actually sold them to cash in on that gain.

This concept is often debated because it could lead to significant tax bills for individuals or businesses based on theoretical gains that could potentially decrease in value later. It also raises concerns about liquidity since taxpayers would need to pay taxes without necessarily having the cash from a sale to do so.

Proponents argue that taxing unrealized gains would help reduce wealth inequality by ensuring that the wealthiest individuals, who often hold significant amounts of assets that appreciate in value, contribute more to the tax system. Since unrealized gains represent a substantial portion of the wealth of the richest individuals, taxing them could ensure they pay a fairer share of taxes. A tax on unrealized gains could generate significant revenue for the government, which could be used to fund public services, reduce the deficit, or invest in infrastructure, education, and healthcare. This would be particularly true for high-value assets that have appreciated substantially over time.

Wealthy individuals can often defer taxes indefinitely by holding onto assets that have appreciated in value, only realizing gains when it is most tax-efficient. By taxing unrealized gains annually, the government would reduce the ability of individuals to defer taxes, ensuring that the tax system captures more of the economic value being generated.  Advocates often frame the tax as a matter of fairness, arguing that all forms of income, including unrealized gains, should be treated similarly. Since middle- and lower-income individuals often pay taxes on their wages immediately, it is seen as fair to tax the wealthiest on their asset appreciation as well.

Opponents argue one of the strongest arguments against taxing unrealized gains is the potential for liquidity problems. Since unrealized gains are not yet converted into cash, individuals or businesses might be forced to sell assets to pay the tax, even if they don’t want to. This could be particularly problematic during market downturns or for assets that are difficult to sell.   Taxing unrealized gains could exacerbate market volatility. If investors know they will be taxed on unrealized gains, they may be more likely to sell assets quickly to avoid large tax bills, leading to potential market sell-offs and increased volatility, particularly at the end of the tax year.

Critics argue that such a tax could penalize long-term investment strategies. Investors who hold assets for extended periods would face annual tax bills on unrealized gains, which could discourage long-term investing and promote short-term trading, potentially undermining market stability and growth.  

There is a concern that a tax on unrealized gains could lead to double taxation. If taxpayers are taxed on the unrealized gain one year and then again on the actual gain when the asset is sold, they could effectively be taxed twice on the same income, raising issues of fairness.  And there could be constitutional or legal challenges to the idea of taxing unrealized gains. For example, in the United States, some argue that such a tax might violate constitutional provisions that require income to be "realized" before it can be taxed.