For people who want to be able to tax unrealized gains like stock, what is the plan for these kinds of events? Would stockholders receive a credit from the IRS when the valuation dips?
People pay property taxes every year on assets that change in value without selling (ie unrealized gains). Nobody seems perplexed by that. But can't seem to figure out how it works for stocks.
Regardless of if you agree or disagree with doing it (which I'm not pushing for or against here), it's not a complex concept.
Hard for me to make sense of taxing unrealized gains. Not even France could make a wealth tax work, and they tax everything.
Land value tax is the proper way to go, questions of how to value land aside.
The issue with a wealth tax is it’s inflationary - most taxes are deflationary but a wealth tax forces you to sell assets to get their cash from them. It does encourage rich people to mark up their assets less, which might reduce apparent income inequality aka make poor people less jealous of them…
There’s no way to borrow against a property to pay a 2% tax for mor than fifty years, for example. You need an outside source of funds, or appreciation.
Right. That’s the idea. Create value or sell the property to someone who will.
If it encourages people to undervalue, or lower the value of something, I don't see how that's inflationary. Could you explain how it would be inflationary?
Lower asset values aren’t deflation because “asset inflation” isn’t inflation. You can’t eat assets and it doesn’t matter if their prices go up because you can buy fractions of them. Asset inflation (the theory that 2010 QE was causing inflation “in the stock market” even though we didn’t see it in goods) is a crank theory from online people who think central banks print money.
Believe me, as a European living in an American city currently “booming”, not only am I perplexed by it but also wonder how in the hell Americans have put up with it for so long.
The negative effects are quite plain to see as people get pushed out of their homes by the wealthy moving in from other states, and yet people seem to want to apply the same fundamentally flawed logic to other asset classes too.
(a) wealth tax. Every year each household with over $XX million in net worth pays y% of the amount above the threshold in taxes. No refund if your net worth goes down in subsequent years.
(b) treat unrealized capital gains as income. Each year you pay income taxes on the increase in the value of your stock portfolio, even if you don’t sell. Any losses can be written off subsequent years’ taxes.
Year 1, I own 10,000 shares at $0.1 each. I'm taxed 25% of $1000, or $250. Year 2, my super smart investment pays off and I own 10,000 shares at $100 each. I'm taxed 25% of an "income" of $999,000, or $249,750. Only, I don't have enough cash to cover the bill, so I sell about a quarter of my stock, leaving me with 7,500 shares. Year 3, the stock goes bust down to $0.2 per share. I write off a loss of $997,500? Does this mean I basically never pay taxes again?
So the end result is I paid a total tax bill of $250,000 on essentially nothing?
Furthermore, what if I decided not to sell my shares when they were worth $100 each and wanted to defer the tax bill. But now the price has crashed to $0.2, and I still owe a massive bill. Is that offset by my tax write-off?
Also worth pointing out that under the current taxes rules the exact same thing would happen if you’d sold all your shares after year two and then invested all the profits into an ill-fated second company.
However, the proposal is mostly to stop a specific tax dodge: stocks that are given as gifts/inheritance exempt both the giver and receiver from paying any capital gains taxes on profits from prior to the transfer. Combine this with tricks like taking out margin loans to fund expenses instead of selling stock, and someone can become a billionaire yet be paying next to no taxes
Don't forget you're also taxed on that sale, so you'll have to sell more than that.
tax-loss harvesting
https://www.investopedia.com/terms/t/taxgainlossharvesting.a...
>Would stockholders receive a credit from the IRS when the valuation dips?
If you realize the loss (ie. sell at a loss), under certain circumstances you can get a credit.
Imagine you're the founder of NFLX and you held $1 billion worth of stock at the peak last year ($690 / share)
The IRS says you owe $300 million (30% of your unrealized gains)
Fast forward to spring 2022. The stock has crashed to $186, your shares are worth only $270 million but you owe a $300 million tax bill.
Not to mention the impossible situation this creates for corporate governance and the general functioning of a business when founders / board members are constantly forced to divest and therefore no one can know who will even control the company from quarter to quarter.
Perhaps you're not familiar with some of the proposals to tax unrealized gains or what this means. This means there have been serious proposals from so-called serious people to tax individuals when a stock they're holding goes up, even if they don't sell that. So somebody is making a point that nobody has made a serious proposal to give a similar credit for unrealized losses. It's just the government wanting to tax and take and take.
> Also, the only people who would be subject to those taxes are already extraordinarily wealthy, so who cares?
You've got it backwards.
The already wealthy aren't the ones bothered by paying a bit more taxes on unrealized gains too much. If Warren Buffet had to pay an extra few million because a stock he held went up, he probably wouldn't really notice. It wouldn't even be a buzzkill on his day.
In the event of a tax on unrealized gains, it's the middle class dude who made a great investment on the next Apple who is screwed over from holding for a few years because he has to sell the second the price went up just a bit to pay that tax.
Second, the proposal isn’t to tax on price changes, its taxing the value of the asset at a given point in time. If the value goes down, the tax collected goes down. This is also how property taxes work - it’s a percentage of the assessed value. If the assessed value drops, you pay less in taxes.
Also, there no reason a middle class investor would have to sell all their stock to pay taxes. If the value of your portfolio doubled, you’d only have to sell between 7.5% and 10% of your holdings to cover the taxes (at the current capital gains tax rates).