The Lunacy of Taxing Unrealized Gains
Sean Ring

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.

 
My story starts in Hasbrouck Heights, New Jersey, where I grew up. My childhood was idyllic. I never thought I'd leave the Heights. Well, maybe just for college. When I was searching for colleges, I only looked within a hundred miles or so. I wound up going to Villanova. I stayed there for four years and earned — their word, not mine — a finance degree with a minor in political science. After that, I went to work on Wall Street. I had a menial job at Paine Webber to start, but then I got my first real Wall Street job at Lehman Bros. (before its collapse, of course). I worked there in Global Corporate Equity Derivatives as an accountant, believe it or not. Honestly, I hated the job back then. I didn't know how spreadsheets worked — yes, even with a finance degree. (Now I'm a Microsoft Excel nut. I think it’s one of the most extraordinary things ever invented.) After that, I moved to Credit Suisse, who sent me to London — the center of global operations for banking. I was young. Not only did I love the city for being a Candyland for alcoholics, but I also needed the international experience to cancel out my mediocre grade point average to get into a top 25 U.S. business school. Somehow, though, I stayed for a decade, until I discovered London Business School. There I earned a master’s (HA!) degree in finance. My next job was as a futures broker, which I utterly loathed. When I had enough, I took a year off — pub crawling around London and pissing away my bonus money. Then I figured out that I needed a new job. So I went to work for a company called 7city Learning, where all of the best finance trainers were working. I had no idea about any of that, but imagine walking into the 1927 Yankees locker room and being taught how to hit. I spent my time teaching all the traders exams, the graduate programs of the various big banks and then the CFA Level 1 review courses. Yes, that's the only level I've passed. I hate that exam. I never really wanted to run money anyway. In 2009, my boss asked me to move to Singapore to help build the business in Asia. Then I went to work for another financial training company where all of my friends had migrated. Around the time I was getting bored of Singapore, my old bank asked me to work at talent development for them in Hong Kong. Nearly three years later, I moved to the Philippines, where I started an EdTech startup called Finlingo. Along the way, I’ve racked up a ton of qualifications — I am a CAIA, FRM and CMT, amongst a few other things — but they don't mean anything. All that matters are my experience, my connections and my takes on things. So every day I'm going to do my snarky best to inform and entertain you.

  

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