Whether the proposal makes it into the “Build Back Better” spending bill or not, the Biden administration’s announcement that it is considering a new federal tax on unrealized capital gains should trouble every American. While the scheme is reportedly developed by Sen. Ron Wyden (D-OR) is only supposed to attach to the “super-wealthy,” that sort of assurance is not worth the digital Twitter ink it is printed with.
One of the significant practical problems with a tax on “unrealized” capital gains is simple assessment. Capital gains have traditionally been imposed on almost every type of investment asset, and assessment has not been complex because it has only been imposed when gains are “realized.” That is when an asset is sold or transferred. At that point, the IRS needs to know the sale price or market value at the precise time it was transferred.
If taxes are going to be imposed without realization, then the volatility of certain types of assets presents significant issues. Some stocks have massive valuation changes throughout a single year. Deciding exactly when and how to place a value for tax purposes will be full of uncertainty and opportunity for misfeasance.
Such a tax could also easily be used to provide taxpayer-funded breaks to favored constituencies and industries. If Congress wanted to give an electric vehicle component manufacturer a handout, it could do so through breaks on unrecognized capital gains taxes.
The tax plan would present severe threats to the cryptocurrency market as well. The value of these assets is determined by personal opinions of value, enthusiasm, and indeterminate market factors. These assets do not have any projections of future earnings or sales as models for valuation. Cryptocurrencies like Bitcoin can swing instantly in value due to a tweet from someone in the media marketplace. In May 2021, Elon Musk suggested that he had issues with Bitcoin’s environmental impact, and the price took an immediate hit.
If cryptos are to be taxed annually on unrealized gains, the entire appeal of the asset type as a safe store of value is impacted, probably beyond repair.
The nature of the Biden administration’s latest “wealth tax” proposal is so radical and probably destructive to ordinary investing that it should be put far away on the most distant back burner. It certainly should not be rushed into the mix of trying to save Biden’s monstrous spending bill.