The Unintended Consequences Of Taxing Unrealized Capital Gains

Many of the highest earners in the U.S., including Elon Musk, Jeff Bezos, Larry Ellison and others, have created millions of new jobs, minted hundreds of thousands of new millionaires and literally improved life on earth.

But never mind all that. They’ve made lots of money, so they’re bad by default.

That’s the attitude, at least, of some progressive lawmakers like Elizabeth Warren and Alexandria Ocasio-Cortex (AOC), who famously wore a dress to the Met Gala with “Tax the Rich” emblazoned on it. Slamming billionaires and “the 1%” is now haute couture.

The latest iteration of this type of thinking is President Joe Biden’s proposed “Billionaire Minimum Income Tax,” which is a misnomer since it would apply to households worth $100 million and above. The proposal is likely dead on arrival as it doesn’t have the votes in Congress, but in its present form, it would levy a 20% minimum tax on all income, including not just realized capital gains but unrealized capital gains.

This is a very big deal. Not to insult anyone’s intelligence, but unrealized capital gains are those you’ve made on an asset you haven’t sold yet. They only exist on paper. The asset doesn’t have to be an investment in stocks or bonds or Bitcoin. It could be some property you own, or the house you live in.

Houses Are Subject To Capital Gains Tax Just Like Stocks

Let’s say you bought a house at $500,000 a decade ago, and now it’s valued at $2 million. Under Biden’s plan, you would be asked to pay Uncle Sam 20% on the gains—even if you had no intentions of selling your house.

Now imagine that the housing market crashes and the value of your home plunges back down to $500,000. Do you think the IRS would refund the taxes they already collected from you?