Unrealized Gain Tax–A Coming Sea Change in FY2025 Budget Proposal?

https://www.forbes.com/sites/andrewleahey/2024/04/30/unrealized-gain-tax-a-coming-sea-change-in-fy2025-budget-proposal/

by tldrthelaw • 2 years ago

13 91 2 years ago

Gormo4• 2 years ago

This is a frightening idea -- being forced to pay taxes on speculative income you haven't actually earned yet will destroy small business and will inevitably be weaponized against anyone who owns any substantial assets, including residential property.

If this passes, I hope the courts strike it down as unconstitutional on the grounds that unrealized gains don't qualify as "income" under the 16th amendment.

mox1• 2 years ago

The Reddit /accounts were talking about this earlier this week and I think most of them had a pretty reasonable take.

1. If one uses an asset as collateral for a loan (be it stock or whatever else), for tax purposes treat that asset as sold, then immediately repurchased at the same price.

2. From there all of the usual tax laws can apply.

So in theory this should get at the core of the actual problem, while avoiding at lot of the messiness of taxing un-realized gains.

It's not perfect, but I think it helps align incentives well. Whoever is lending the money probably wants to know the value of the collateral. Lender and borrower are now both incentivized to come up with the real value at the time of the loan.

nightski4• 2 years ago

So small business can't take out loans unless they can realize and be taxed on the full valuation of their company immediately? As much as I can appreciate the goal, this is absurd.

Spartan-S63• 2 years ago

Yeah, I agree with this take. I think making an issue of unrealized gains isn't the real story here. Using unrealized gains/assets as collateral is the way the ultra-wealthy avoid large swaths of income tax.

I see two reasonable paths forward for taxing using assets as collateral:

1. Treat it as a sale and repurchase (as you described) and transform capital gains into a progressive system 2. Treat the sale as earning income for purposes of using the traditional income tax brackets.

Either way, you don't get into a weird speculative tax gray area. Rather it's when the ultra wealthy want cash-on-hand that they incur some kind of income tax penalty. Maybe even put in a reasonable exemption ($25-100k/year) that doesn't trigger tax so that middle class households aren't hamstrung by this.

awongh• 2 years ago

Maybe it’s just a marketing problem then and it should be called asset collateral tax rather than unrealized gain tax, which on the face of it sounds kind of stupid.

rich_sasha• 2 years ago

Interesting.

How does this interact with something trivial like remortgaging a house?

Say I bought a house for 100k, cash. Now it's worth 200k. I want to take another 50k mortgage on it. Do I realize cap gains on 25% of my house, i.e. an increase of value on 25k to 50k, and then I'm liable for cap gains on 25k? At 20% say, that's 5k tax. Unpleasant for sure, but doesn't seem out of proportion.

snapplebobapple• 2 years ago

That will cause quite a painful but interesting deleveraging, i like it.

QuadmasterXLII• 2 years ago

My understanding of the proposal is that households worth more than $100 million would pay an annual minimum tax worth 25% of their combined income and unrealized capital gains. This doesn’t seem insane? In particular, that’s a hell of a residential property

thegrim33• 2 years ago

With all these sorts of things where they promise it'll only affect subset X of people, and then in the future once its been passed it's then changed/extended to affect subset Y in addition, I wish someone would suggest some way to just add a clause in, something like "This law is only to target X subset and if anyone tries to change it to affect a different subset of people, or pass a new law that extends its scope to a different subset, all such laws are instantly made invalid and dropped from the books". Or something along those lines.

If they promise it'll only ever affect the "super rich", then encode that in the law and ensure us, by law, that's what it'll be. If they truly don't want to expand its scope further, then have a mechanism that enforces that.

(Of course, this is a separate issue from whether it's even moral to target subset X in the first place, which I won't get into).

Rebelgecko• 2 years ago

My city passed a "mansion tax" for people who own multimillion dollar homes. However the threshold for where the extra tax kicks in isn't adjusted for inflation or the top X percentile of most expensive homes. So we're on track for the average single family homeowner to be paying the "mansion tax" in another decade or so. It's already hitting some multifamily buildings.

Also reminds me of AMT. When it was originally created, one of the selling points was that it would only impact 155 wealthy families, households who made the then-insane income of over $200k but paid very little in income taxes. By 2017, over 5 million households were paying AMT, particularly those in states with high SALT taxes where $200k/year doesn't afford as lavish of a lifestyle as it used to.

mattm• 2 years ago

Yes here's the actual proposal. I'm sure it's not coincidence that it's left out of the Forbes article

The proposal would impose a minimum tax of 25 percent on total income, generally inclusive of unrealized capital gains, for all taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) greater than $100 million.
Minimum tax liability would be reduced to the extent that the sum of minimum tax liability and uncredited prepayments exceeds two times the minimum tax rate times the amount by which the taxpayer’s wealth exceeds $100 million. As a result, the minimum tax would be fully phased in for all taxpayers with wealth greater than $200 million.

DebtDeflation• 2 years ago

Yes, this is better framed as a new Alternative Minimum Tax on people with net worth >$100M than a blanket tax on unrealized capital gains.

howeyc2• 2 years ago

Imagine step 2 to realize the insanity. That household likely doesn't have disposable income that is greater than 25% of their unrealized cap gains, so what do they do?

1. Hope they can get a low interest loan to pay their taxes?

2. Sell some assets. Think about what will happen to your 401k balance as wealthy people all over the US are forced to sell stocks. It will not be pretty.

randomdata3• 2 years ago

Especially when the stated concern is actual income already realized. Why not just tax the income?

__loam4• 2 years ago

Because ultra rich people like Bezos can dodge taxes by taking loans against their unrealized gains indefinitely.

cma• 2 years ago

The United States had inheritance taxes before it had a federal income tax.

The first federal inheritance tax in the U.S. was introduced in 1797 as a temporary measure to fund a potential war with France.

jfoutz2• 2 years ago

unrealized gains in property are already taxed by "property taxes".

If I buy a $1000 dollars worth of stock, and use that to secure a $1000 loan. ok, fine, I don't see why that should be taxed at all. But if the lender believes the stock is worth lots more, and offers a $2000 secured loan, something's going on there.

I don't think it should be as much as actual capital gains, because it's not actually turned into cold hard cash. And there's still risk of the underlying asset price falling.

But if the lender says my $1000 is worth $2000, I'm getting some benefit of the higher value. And I can see why that would be taxed. I'd really want to see the details. probably that tax should be deducted from capital gains when finally realized.

I dunno. it's complicated.

azulster3• 2 years ago

may be it shouldnt be the same as capital gains, but it should be related. like maybe it should be (capital gains tax rate - interest rate of loan) else it will simply be a way to continue to pay less taxes and still have your income as cash on hand

danaris3• 2 years ago

The purpose of this isn't for someone who buys $1k of stock then uses that as collateral for a $1k loan.

It's for someone who has zero traditional income, but owns stocks worth $100M+, and uses, say, $2M of that as collateral for a $2M loan so that they can have liquid assets.

rufus_foreman• 2 years ago

> unrealized gains in property are already taxed by "property taxes"

Not at a federal level.

voisin2• 2 years ago

destroy small business

On the All-in Podcast they said it was only on unrealized gains over $100m. This is meant to target the Bezos and Musks of the world who can avoid taxes by borrowing against unrealized gains.

billconan2• 2 years ago

I’ve been trying to understand how the budget proposal process works, including how it is voted on and approved, but I couldn’t find much information.

For example, with FY2025 starting on October 1, 2024, does this mean any proposed tax rate hikes would take effect on that date, or would they start on January 1, 2025?

Additionally, since Trump’s tax cuts are set to expire on December 31, 2025, does this guarantee that tax rates will remain unchanged until that date?

jeffbee• 2 years ago

Congress can change the rates at any time, and they can set the effective date to any date. Whether they would do that or not is an open question.

billconan2• 2 years ago

Is there a way to track Congress’s activities related to potential tax rate changes? I’d like to stay informed and avoid being caught off guard by any sudden changes.

I’ve looked into this, but it’s more complicated than I expected. For example, Congress votes on 12 separate appropriations bills related to the budget, and I’m not sure which ones impact tax rates or when those votes are scheduled?

jcpham2• 2 years ago

If you want capital flight this is how it starts. If this went into effect I would owe taxes on several hundred thousand dollars in gains that I can't afford, or I couldn't afford unless I sold stuff, causing more taxable gains.

Seychelles shell corp looking pretty good right now.

kcb2• 2 years ago

Don't forget once this mass sell off happens it's likely to tank the entire economy. But at least for a brief period the federal government will have to borrow $1 trillion instead of $1.5 trillion to cover the deficit.

__loam4• 2 years ago

I'm under the impression that this policy would only apply to individuals with over $100m in assets. I'm sure there's reasonable provisions that could be applied to this with respect to liquidity. These proposals are obviously targeted at individuals like Jeff Bezos who do things like take out loans against their unrealized gains so they don't have to pay taxes on their wealth.

greentxt2• 2 years ago

Policy targetted at one person, or a small heterogenous group of people, is not good policy.

silverquiet• 2 years ago

It's a strange thing to me that it is impossible to stop foreign entities from extracting value from our country. It makes it seem as though we do not have sovereignty in our own home.

azulster3• 2 years ago

if you are worried about being able to afford the taxes on your assets then you just plain arent rich enough for it to apply to you, dont worry you are safe

tristor3• 2 years ago

This is almost certainly untrue. The issues is that at any asset level, the tax itself can force a sale, which forces realization of gains. Whether that is on-balance more than the value realized is another question, but it definitely could force a sale at any asset level depending entirely on the ratio of your liquid to non-liquid assets.

So, in effect, the question is, should the government use tax as a club to force you to sell assets? Does this have any benefit for the economy/society?

jawns• 2 years ago

If, however, we consider the fact that the aforementioned billionaire could borrow money using the appreciated stock as collateral — perhaps, say, to purchase a social media company — we might feel somewhat differently. After all, absent some mechanism by which the billionaire can be taxed, they can at least in theory defer ever realizing their gains by continually borrowing against their stock rather than selling any of it.

This line is a great way to both throw shade and to make it clear that there are real-world examples of people currently exploiting this strategy.

I wonder if it would be possible to just say, "If you have unrealized gains and aren't borrowing against them, then no taxes are necessary, but if you attempt to borrow against them, then they are treated as 'realized' even if they're not sold."

That protects the interests of people who don't have the option to realize their assets (e.g. no liquidity event available) while still closing the loophole that allows billionaires to borrow against those assets tax-free.

Xcelerate• 2 years ago

How do ideas like this actually get taken seriously? Is this just for votes? I’m all for the end goal here but mandating it by fiat seems to ignore various unpredictable second order effects that could crash the economy and drive innovation out of the U.S. Too many unknown unknowns.

I would be much more in favor of implementing universal basic income instead of taxing unrealized capital gains. If the stock market + inflation + pledged assets is a gradual way to transfer more wealth to the already wealthy, then UBI would be a much “smoother” counterbalance to this process.

Brian_K_White• 2 years ago

Can you pay your tax on your unrealized gains with unrealized money?

Nifty3929• 2 years ago

Would this new tax create any more STUFF? The economy does not produce money - it produces stuff. Stuff like food, medicine and video games.

Does taking this money from people - even very rich people - produce any additional stuff for the rest of us to consume? I don't see how. I can't eat money. I can't live in money.

Will these rich people consume less stuff for themselves? Will it be enough less to matter to any of the rest of us? I doubt it.

So what's the point of all this? How about we focus on producing more stuff, so that we have more stuff to live in, eat, or treat our bodies. If we produce more stuff, we will have more stuff.

Taking money from rich people and giving it to everybody else will not help everybody else, since there will not be more stuff for them to buy.

danaris3• 2 years ago

That's looking at the situation too simplistically.

Stuff is produced when there is demand for it. When people have less money to spend, there is less demand.

If this tax puts more money in the hands of the bottom 90%—and especially the bottom 50%—it will increase their buying power, which will increase demand, which means that, in all likelihood, more goods will be created for them to buy.

...I think it's also worth noting that for the vast, vast majority of people, what's standing in the way of them buying stuff is not the lack of stuff available to buy: it's lack of funds to buy it with. So on that front, too, your analysis doesn't really hold true.

gregatragenet3• 2 years ago

'Unrealized Gains' is one of the methods by which the wealthy avoid paying taxes. When you read the article about 'Billionaire X paid 2% taxes this year' this can be the cause.

It works like this: you pay taxes on income, or realized gains (sold your stock). But you don't pay taxes on unrealized gains.

You have TSLA/AMZN/NVDA stock which has gained $10M, and you have a mansion/yacht payment coming due. You could sell the stock and pay $2M in taxes...

You can get a loan with your stock as collateral. You may pay 7% interest but you still OWN the stock and the S&P grows at a rate of 10%, netting you a 3% annual profit on your collateral stock. AND the interest might be tax deductible offsetting other income taxes you may owe. You pay 0% taxes because you didn't sell anything.

Search for 'buy borrow die' for more resources on this strategy. This new tax proposal is trying to address the problem that the most wealthy individuals in our society pay a much lower percent in taxes compared to the average individual using this type of strategy.

kcb2• 2 years ago

Surely this law that specifically effects holders of the assets we all have our retirements in will have no externalities which effect me.

cjbgkagh4• 2 years ago

I think most people are OK with the $100M+ thresholds but are uneasy about the incentives this sets up where the government can extract large amounts of money from inflation which is in effect a tax on the poor and in general benefits the asset holding rich. And there is a reasonable expectation that the bands will lower over time in both nominal and real terms to cast an ever wider net.

I have long maintained that this has to happen mathematically because the government needs more money and there are not many places where they can get it. A high enough unrealized gains tax coupled with a high enough inflation is in effect a wealth tax. A high enough wealth tax can in effect capture a large chunk of the profit from the wealth, theoretically it could go higher than 100% of profit (e.g. 50% income tax, 6% inflation, %4 profit on wealth = %2 profit after taxes - %3 tax on nominal asset gains = -1% p.a. in real wealth. It has the real potential to be confiscatory in nature. Even the risk of this would likely result in capital flight so this tax plan would have to be exported globally to limit the number of places that capital can escape to.

Unrealized Gain Tax–A Coming Sea Change in FY2025 Budget Proposal?

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