If you can take loans using unrealized gains as collateral, then you should also pay taxes for them.
Normal unrealized gains are hard to put a real value on. Unrealized gains used as collateral just had you and a bank agreeing that there's something real and dependable there.
I anticipate this scenario: "Hey, tax-dude, you know that $50,000 of Amazon stock I bought back in 2009? Well, I just used it as collateral to borrow some cash from my buddy, which I'm told I need to inform you about. He stared real hard at the stockamajigs said it was worth $50,000, and lent me that same amount. So anyway--major bummer here--it turns out I made zero profit on that pointless investment, which by-the-way means don't owe any kind of capital-gains tax at all."
I'm suggesting that's the realization event. That $50,000 is taxed as capital gains at that point. The subsequent loan value is immaterial to income calculations just like all other loans.
From a tax perspective it'd be like if you sold and immediately rebought the stock or whatever.
Why would someone worth that much money want a $50k loan, and put up 150 million dollars of assets as collateral to avoid paying taxes on the loan? If they miss a payment they lose everything.
Adjusting the numbers to normal human scale, it'd be like someone putting up their $1 million house as collateral, to secure a loan for 300 bucks, so that they can skirt 100 bucks in taxes.
> If they miss a payment
A non-issue since they will immediately repay the loan, and the lender is obviously complicit in the scheme.
> Why would someone
It's not about skipping taxes on the $50k loan, it's about skipping taxes on the $150,000k-ish investment by using and artificial valuation.
It's like if you sold and immediately re-bought them from a capital gains perspective.
A $50k loan won't buy you your mansion, nor will it help you avoid any taxes when you do try to realize some of the value of your Amazon stock.
The point is that if you and a bank jointly agree the asset has appreciated in value, and you give the bank a claim on that asset in order to be approved for a big loan, this collateralization activity should be treated as a taxable event in the same way that a sale is, because both activities are different ways of realizing the gains.
I say "arguably" because the process gives another party a claim against the asset, which means you no longer own it in the same way. You're no longer free to use or dispose of it as you wish.
Imagine, I have $1000 unrealized gain in year1. Next year market tanks and I now have -$2000 in year2. Year after that market goes backup and now I have $0 gain in year3. If I hadn't sold my investment for 3 years, I have net gain $0 and I should pay $0 tax. However, taxing unrealized gains means I will have to pay tax on additional $1000 that I never had.
Why not? Obviously not 100% of the unrealized gain, but in most jurisdictions property tax (a subset of wealth tax) is a percentage of the market value (or some proxy) of the house.
And while people might think that they are not receiving government services just for owning land, they would be wrong. Owning land means nothing if you cannot defend it, or you cannot pay someone else to defend it for you.
All those courts/lawyers/police/military cost money, as well as other government services necessary to maintain social order.
If anything, the current situation of income taxes making up most of government revenue means that people who work are disproportionately paying for expenses that disproportionately benefit people who own.
> However, taxing unrealized gains means I will have to pay tax on additional $1000 that I never had.
But would you say you derived a benefit from a society that allowed you to maintain title to something peacefully? Because that mechanism is not free.
Unrealized gain tax would create a huge industry trying to put valuations on random restaurants and car dealerships, and the market for small businesses like that are very illiquid, so they will get detached from reality fairly fast.
The idea is to tax people who make their money through asset appreciation at the same rate as the folks who make their money by selling their labor.
> Imagine if property tax was %10-50 of your property value vs. the %0.5-%2 it is today. Nobody would own their properties anymore in a span or a year or two.
I'm not sure if this is a disingenuously hyperbolic argument, but on the off chance you literally believe the government is trying to charge recurring, annual, double digit percentage taxes on the entire value of the assets, that's not how it works. The tax is only on the appreciation. If the asset doesn't appreciate, no tax is owed.
The suggestion was tax on unrealized gains used to back loans. You'd only be taxed on $1000 if you used $1000 of your unrealized gains to back a loan. That should also raise your basis by $1000, so sometime later when you sell the property you wouldn't be taxed on that $1000 unrealized gain again.
If that sounds crazy, it is, but it also makes something as crazy as tax on unrealized unliquid gains you cannot sell too somewhat possible. Many, many new businesses that are growing would essentially have to be liquidated to the government in a few years.
There are a lot of problems with taxing unrealised gains. Say you paint a picture for fun, I say that's brilliant it's probably worth $1m, do you then have to try to borrow $200k to send to the tax man? And many similar more mudande situations along those lines.
Look at US spending and note that the money goes towards (1) the wealth bonfire of permanent war and (2) a large and complex welfare state split between health care, pensions and other services. Neither of those are capital formation (the wars are in fact capital destruction). Everyone will get better outcomes if the money that goes to capital formation is protected from tax because the benefits of capital are substantially higher than the benefits of consumption spending. Literally the only thing keeping our standards above a typical baboon's is that capital being built.
The real problem here is pretending things that are capital destructive are valuable - the 2007 crisis response bailing out bankrupt banks springs to mind and the ongoing cover to various unprofitable businesses with the low interest rate regime so people can get wealthy while not building anything useful. But randomly taking money from people making unrealised capital gains doesn't fix that, and it just puts more money into the pot that funds the war machine.