Unrealized Gains Should Not Be Taxed

In March, President Joe Biden announced a plan to raise revenues for the U.S. government by taxing unrealized gains on assets for those claiming over $100 million in assets. A tax on unrealized gains would mean that even if you had not sold a stock or other asset, you would need to pay tax on it if it appreciated in value.

To be fair, this proposal is unlikely to pass Congress, but depending on who ends up controlling the White House and Congress, it conceivably could.

If you are an investor, this is an important topic because it could overturn your assumptions about your appreciating investments. Note that in the case of real estate property, we already do this through a property tax. Currently, in the U.S. we pay taxes only on stocks we have already sold, though.

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Unrealized gains tax has been in the news recently due to the Moore v. United States case, as well. In a June ruling on that case, the Supreme Court upheld the mandatory repatriation tax, but in their penned decision, the majority made it clear that this ruling was simply for the MRT and not other situations involving unrealized gains. So the topic is not yet settled, outside of the MRT.

A spending problem

Gross domestic product, or the value of all the goods and services made and created in the U.S., was around $28.27 trillion in the first quarter of 2024. However, as of this writing, our total debt was around $34.83 trillion, according to the U.S. Treasury's Fiscal Data service. The U.S. Congressional Budget Office recently estimated the total debt will exceed $50 trillion by 2034.

Already we are seeing problems funding future liabilities for Social Security and Medicare. We have compounded the problem by expanding the government bureaucracy and funding foreign wars.

While I'm not an economist, as an investor who runs a family office, I believe that instead of taxing unrealized gains, what the government really ought to do is to rein in its spending. The U.S. debt-to-equity ratio was already at around 122% as of late June, compared to around 57% in 2000 and around 34% in 1980, according to U.S. Debt Clock. 

In addition, we are selling more Treasury bill debt. Worse, we are doing it on the short end of the curve with high interest rates. The 2024 federal debt interest payments are forecast to be around $870 billion, compared to $822 billion for defense spending. 

That is not good. Just like with personal finance, if you are not making enough, you need to cut back on unnecessary spending. Running the money printer is not really the answer and has contributed to our problems with inflation.

Meanwhile, the valuation-adjusted U.S. Treasuries holdings of foreign central banks are falling. Maybe these traditional bond buyers see the rising U.S. debt-to-equity ratio and wonder if there is an increasing chance they will not get their money back.

In fairness to the U.S., global debt has risen in many countries, due to the pandemic.

An unfair proposal

So now the emphasis is on creative taxation measures. In my opinion, this new proposal to tax unrealized gains is un-American at the very least. If people and businesses make a profit on the sale of an asset, those definitely need to be taxed. But if the asset has not been sold yet, why tax it?

The U.S. has a very complicated tax code, so I support efforts to simplify it and get people to pay their fair share. However, taxing unrealized gains should be off the table. 

Taxing assets that you have not even sold and profited from is not fair. If this proposal goes through, will the government then also rebate or return unrealized losses?

Imagine you are an innovative tech startup, maybe the next Google or Tesla, but still in a garage. All you can pay your startup employees aside from minimal cash are stock options. Once the company starts growing and the share value of these assets rises, do you really want your company and employees to sell their shares just to pay that tax? Does that not create another taxable event because you sold shares to pay a tax obligation? 

All that would likely do is weaken promising companies and incentivize talented entrepreneurs, creators and others to move out of the United States to innovate elsewhere.

Above all, there is the absence of fairness. The asset owner has not even realized the value of the asset, and the government already wants to tax it. 

That sounds more like confiscation and not really taxation.

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