The Lunacy of Taxing Unrealized Gains

My goodness, I didn’t think I could hate the present administration more than I already do. It’s a fountain of idiotic ideas, starting with shutting down the Keystone XL pipeline to just sending $61 billion to Ukraine.

You may as well just set the money on fire.

Everything Boneheaded Biden has done has made things more expensive. And don’t give me, “Well, inflation has come down!”

If a product costs $1 in 2021 and then suffers from 10% inflation in 2022 and 5% in 2023, it’ll cost $1.16 right now.

So the inflation rate may have come down, but prices sure as hell haven’t. Politicians and WSJ writers still don’t get that. They’re still confused about why The Great Unwashed is so peeved.

But if you think practically everything Joke Biden has done so far is counterproductive, wait until you hear this one.

The Biden administration wants to apply capital gains tax to unrealized gains.

What Are Unrealized Gains?

First, let’s define what they want to tax. Let’s say you buy a stock for $10. Over a few months, the stock price grows to $18. You now have an $8 capital gain, but it’s not realized. You haven’t sold the stock yet to realize the gain. Therefore, you have an $8 paper gain, also known as an unrealized or uncrystalized gain.

Under the current tax system, you pay no tax on this unrealized $8 gain.

Let’s say your stock later rises to $20. You’re thrilled as your stock has doubled. Now, you want to sell at $20. Since you bought the stock at $10 and sold it at $20, you realized a $10 capital gain. The IRS will kindly ask you to pay capital gains tax (CGT) on the $10 gain.

If you’ve held the stock for less than a year, it’ll be taxed as ordinary income.

If you’ve held the stock for over a year, it’ll be taxed at either 0%, 15%, or 20%. For the sake of this example, let’s say you’re in the upper tax bracket of 20%. That means you’ll pay $2 to the IRS because they said so.

I don’t like CGT any more than I like any other taxes. But at least in the current system, you have the cash to pay the tax.

What Bumbling Biden and his buffoons want to do is tax you on gains before you’ve sold the shares. It’s asinine.

Let me show you.

Going back to our example, let’s say on December 31, 2024, the stock price stood at $18 after you had bought it earlier in the year at $10.

The IRS would want $1.60 from you (20% of the $8 gain). Since you didn’t sell the shares, I hope you have some spare cash around!

Why Would Anyone Even Think It’s a Good Idea?

No one does except the idiots in the West Wing.

The only reason to consider it a good idea is if you’re a leftist redistributionist. That is, if you’re into confiscation, theft, and thievery. Because that’s all this is.

Of course, the leftists in DC will say how taxing unrealized gains is one way of getting money out of the rich’s hands. Stop it. Governments can’t do that because if the people in the government were smart enough to do that, they wouldn’t be working for the government.

The Reasons Against It

There are some excellent reasons to ensure your congressman never votes in favor of this stupidity.

Violation of the Ability-to-Pay Principle: One of the fundamental principles of taxation is the ability-to-pay principle, which states that taxes should be levied according to a taxpayer’s ability to pay. Taxing unrealized gains violates this principle because the gain is not actual income until the asset is sold. And yes, I’d argue it’s not “income” to be taxed anyway. Individuals can have significant unrealized gains but little cash to pay the tax.

Let’s go back to our example, except our stock got FDA approval on December 31, 2024, for a new drug treatment they created. The stock went from a paltry $10 to a meaty $160. That’s a $150 unrealized capital gain. Twenty percent of that is $30. What if you don’t have $30 lying around? That’s massive trouble for you.

Potential for Double Taxation: Unrealized gains are often subject to double taxation. When the asset is eventually sold, the gain is taxed again as a realized gain. This double taxation is seen as unfair and punitive.

Watching the IRS calculate the unrealized and realized capital gains would be a nightmare for anyone trying to be honest and pay their taxes.

Disincentive to Invest: Taxing unrealized gains could discourage investment. The prospect of being taxed on profits that have yet to be realized might deter individuals from investing, which could have broader economic growth and development implications.

The other problem is the forced selling of stocks from December through April so people can pay their capital gains taxes.

Market Volatility: Market volatility can make the value of investments move quickly. An asset might increase in value one year, leading to a tax on the unrealized gain, only to decrease in value the next year. This could result in individuals paying tax on gains that they ultimately do not realize.

Let’s go back to our example. On December 31, 2024, our stock just got FDA approval for a new drug treatment they created. The stock had gone from $10 to $160. That $150 difference is an unrealized capital gain. Twenty percent of that is $30. You have the cash and dutifully pay $30, even though you haven’t sold the stock yet.

Now, let’s say in 2025, the stock tanks back down to $10. You froze, praying to the market gods that the fall would stop, so you didn’t sell. Do you get the $30 you paid in tax back? How would that work?

Wealth vs. Income: There’s a fundamental difference between wealth and income. While income is a flow of money (like wages from a job), wealth is a stock of money (like the value of a house or stocks). Taxing unrealized gains is effectively a controversial and ethically fraught wealth tax.

Regular CGT is bad enough. This unrealized version is even worse.

Wrap Up

You may say this tax is a 25% annual minimum tax on unrealized capital gains for individuals with incomes and assets exceeding $100 million. And that’s great because we should soak the rich… get them to pay their “fair share,” whatever that is.

But what if they take their money and run?

We need as much capital as we can get. Capital is what separates the developed from the developing. Capital is the lifeblood of advanced civilization.

I’m pretty sure this tax will never get past Congress, if only because every rich person owns at least one Congressman. But still, it’s a scary concept that needs to be known… and destroyed.