Unrealized Gain Tax–A Coming Sea Change in FY2025 Budget Proposal?
forbes.com
forbes.com
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.
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.
In response to "If one uses an asset as collateral for a loan" you wrote "So small business can't take out loans unless they can realize and be taxed on the full valuation of their company".
A company can also get asset-backed loans using as collateral something the company owns - or it can get a completely different kind of loan where there is no specific asset used as guarantee.
I don't think "slippery slope" is a reasonable defense here, especially with the situation you're using as an example. The top 40% of earners is a lot of people, and pretty close to the number of people that pay positive income taxes today (50% of earners pay 97% of taxes). The slope you're using as an example doesn't look very slippery, especially given that 100+ years of the US changing completely has happened in the meantime.
2) You're choosing 1917, pre changes, to paint an inaccurate picture. Top rate went from 15% to 67% that year, and 77% the year after. Almost double today's top rate.
What happened was, we introduced a revenue system, and have changed it over time, often dramatically, as the country's needs have changed, both raising and lowering rates. We haven't gone down some crazy spiral of ever increasing tax rates. If anything, the tax situation for the rich has gotten better over time, not worse.
I'm not sure what you're arguing - that it changed dramatically or that it has not changed dramatically. If you're arguing it has changed dramatically then I guess we are in agreement.
You should also note that 1917 was prior to the introduction of sales taxes (1921) and social security taxes (1937). Looking at only federal income tax paints an rather incomplete picture when looking at total tax burdens.
"A married couple with no kids will pay < 5% on 50k" I assume they're dual filing for the 50K so 25K on average? The lower %16 percent of the population. A weird number to pick.
Im arguing that the original comment, that income taxes weren't originally intended to be what they are today, or it was some kind of bate and switch, or slow bleeding, that led us to today. That was my read of thread parent anyway.
> You should also note that 1917 was prior to the introduction of sales taxes (1921) and social security taxes (1937). Looking at only federal income tax paints an rather incomplete picture when looking at total tax burdens.
We aren't arguing about total tax burden, we are arguing that a new kind of tax will/won't necessarily be abused and changed post introduction. Those three tax vectors prove that they won't be if anything, as they haven't changed much since introduction either.
>A married couple with no kids will pay < 5% on 50k" I assume they're dual filing for the 50K so 25K on average? The lower %16 percent of the population.
1) Most households were single income in 1917. 2) 50k was inflation adjusted equivalent to numbers that I was responding to. I didn't pick it at random, I chose it to show things hadn't changed much.
Judging by the timeline, it seemed like initial low rates had more to do with it being a new system, and less to do with some kind if "we will only do this to the rich" promise.
Also, they tried implementing income taxes previously, had it struck down by supreme court, then all the states got together to pass an amendment to allow income taxes. So, it was a pretty strongly supported change.
Honestly, I can get on board with "government tends to only grow in scope" point of view, I just don't think income taxes illustrate that point at all.
(That sounds unlikely to me, but I know little enough about the intricacies of business finance that it could be true...)
Most small business owners probably can’t even do this, because banks won’t accept their shares as collateral. So in a sense you could say this would even the playing field between big and small business.
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.
My main concern is that it puts the government in a position to greatly benefit from inflation, even more so than it does now, and inflation will be the hidden tax that hurts the poor.
There are many web sites that claim this, but are there any actual reliable stats on how many lifetime loans are being given out? It is common to make short terms based on using stocks, etc as collateral. But how common is it to have a lender be ok with either deferring interest for decades until the person dies or continually giving new loans out to cover the interest (on paper at least)? Doing a quick search, I have not found one stat on how many lifetime loans like this are actually being done. There is a treasury department page claiming that about 160 billion dollars in unrealized gains are not being taxed, but that isn't talking about stock being used as collateral, that is talking about simply the value of assets increasing - that is entirely different. (If unrealized nominal gains should be taxed, should decreases in the value of assets lead to a tax refund?)
According to this: https://finance.yahoo.com/news/jeff-bezos-sell-5-billion-185... Bezos has sold around $13.4 billion in stock in 2024. If he could easily avoid millions (maybe billions) of dollars of capital gains tax by this one simple technique, why wouldn't he have?
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.
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).
B: I'm concerned about that.
A: Okay, let's do X but in a much more limited way.
B: Okay.
<2 years later>
A: Hasn't X been great? Let's expand it.
B: Okay.
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.
> 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.
1. Hope they can get a low interest loan to pay their taxes?
Or
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.
A sudden tax bill and the end of acquiring new debt are when massive wealth unravels.
Bubbles die when cash flows dry up.
When Elon sold in his latest Tesla round the stock tanked 30% over a couple months. Repeat for Bezos, Gates, etc.
It is understandable why it wasn’t taxed historically, but as the article says, the market is changing.
But I'm still not sure what problem any of this is trying to solve in the first place. Does anyone seriously think this would solve the federal budget deficit?
1. Data collection.
2. Behaviour incentivization/disincentivization.
3. An avenue for money destruction.
With inflation concerns still lingering, #3 is on minds. We also are coming to recognize that we don't actually have a great handle on how much wealth is out there, which is no doubt why this seeks to tax the wealth and not the associated income. But I suspect the greatest driver is that the general public are increasingly coming to think that the rich are not behaving in desirable ways and want to change their behaviour, with this being an appeal to that.
The first federal inheritance tax in the U.S. was introduced in 1797 as a temporary measure to fund a potential war with France.
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.
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.
That's called tax efficiency ;-)
Not at a federal level.
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.
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...
OR
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.
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.
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.
Seychelles shell corp looking pretty good right now.
But I also think policy shouldn't be based on (these) sentiments alone. Policy should be judged by it's net impact. This seems like absudly myopic policy, coming from the same bright minds who gave us a 2 trillion dollar stimulus package they named "inflation reduction act" that was a net negative for working people, but a boon bureaucrats and other industry special interests.
I also disagree with assessment of the stimulus and the inflation reduction act. In terms of monetary policy, juicing the economy with stimulus is exactly what you're supposed to do during times of economic crisis. Policymakers wanted to avoid the slow recovery of 2008. The ultimate result of post-covid monetary policy is that we had a brief period of major inflation (much of which was caused by pandemic and war related supply shocks) but things are getting back to normal and we've largely avoided the worst outcomes. With respect to the inflation reduction act, large investments were needed in infrastructure maintenance, onshoring manufacturing, and tackling climate change. That law did all those things, so I don't really care what they call it tbh.
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?
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.
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.
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.
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?
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?