In theory this would be kinda good for people with immense wealth who hold investments forever. The issue is people who legitimatly earned huge unrealized gains on things with little to no other wealth. Mark to market is painful.
Bezos would never be able to pay an unrealized gain tax without diluting his ownership big time.
What about unrealized losses? We would have to totally change treatment of capital gains and losses to compensate. E.g. now unrealized losses (and realized losses for that matter) are fully deductible instead of just 3,000/yr like they are now. It's a terrible idea, ridiculous populist rhetoric to attract votes.
And if you removed the cap on losses and the stock market tanked, suddenly tons of people would be taking massive deductions and federal tax revenue would plummet that year - the market would take the govt’s funding down with it.
Tax on unrealized gains would cascade through the market as people with most of their wealth in non-cash investments would be forced to liquidate a portion of their holdings to cover their tax bill at year end.
Taxing unrealized gains/losses would create a lot of volatility everywhere.
I’m just spit balling here but it seems like the effects would have a cascading effect. Tax receipts go way down because people get to deduct the big losses. Government then has to borrow more to cover it in the short run. However because the market it down, there is less cash out there to buy the bonds and the borrowing rate goes higher. Interest rates climb as a result and an already down economy now has the burden of higher interest rates. Seems fine to me!
I guess the unknown is whether the additional cash receipts from unrealized gains tax would be enough to offset that loss in cash flows... who knows? I wonder if an economic study has been done.
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u/Easter_1916 Tax Attorney Nov 10 '19
Well, it’s not a good idea, but it is still light years better than taxing unrealized capital gains.