from Hacker News

Unrealized Gain Tax–A Coming Sea Change in FY2025 Budget Proposal?

by tldrthelaw on 8/28/24, 2:39 PM with 113 comments

  • by Gormo on 8/28/24, 3:05 PM

    This is a frightening idea -- being forced to pay taxes on speculative income you haven't actually earned yet will destroy small business and will inevitably be weaponized against anyone who owns any substantial assets, including residential property.

    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.

  • by gregatragenet3 on 8/28/24, 4:07 PM

    'Unrealized Gains' is one of the methods by which the wealthy avoid paying taxes. When you read the article about 'Billionaire X paid 2% taxes this year' this can be the cause.

    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.

  • by cjbgkagh on 8/28/24, 5:24 PM

    I think most people are OK with the $100M+ thresholds but are uneasy about the incentives this sets up where the government can extract large amounts of money from inflation which is in effect a tax on the poor and in general benefits the asset holding rich. And there is a reasonable expectation that the bands will lower over time in both nominal and real terms to cast an ever wider net.

    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.

  • by Brian_K_White on 8/28/24, 3:51 PM

    Can you pay your tax on your unrealized gains with unrealized money?

  • by jawns on 8/28/24, 3:44 PM

    > If, however, we consider the fact that the aforementioned billionaire could borrow money using the appreciated stock as collateral — perhaps, say, to purchase a social media company — we might feel somewhat differently. After all, absent some mechanism by which the billionaire can be taxed, they can at least in theory defer ever realizing their gains by continually borrowing against their stock rather than selling any of it.

    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.

  • by kcb on 8/28/24, 4:17 PM

    Surely this law that specifically effects holders of the assets we all have our retirements in will have no externalities which effect me.

  • by jcpham2 on 8/28/24, 3:28 PM

    If you want capital flight this is how it starts. If this went into effect I would owe taxes on several hundred thousand dollars in gains that I can't afford, or I couldn't afford unless I sold stuff, causing more taxable gains.

    Seychelles shell corp looking pretty good right now.

  • by Nifty3929 on 8/28/24, 3:52 PM

    Would this new tax create any more STUFF? The economy does not produce money - it produces stuff. Stuff like food, medicine and video games.

    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.

  • by Xcelerate on 8/28/24, 3:49 PM

    How do ideas like this actually get taken seriously? Is this just for votes? I’m all for the end goal here but mandating it by fiat seems to ignore various unpredictable second order effects that could crash the economy and drive innovation out of the U.S. Too many unknown unknowns.

    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.

  • by billconan on 8/28/24, 3:19 PM

    I’ve been trying to understand how the budget proposal process works, including how it is voted on and approved, but I couldn’t find much information.

    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?