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Currently, the tax code stipulates that unrealized capital gains are not taxable income. This means that someone who owns stock or property that increases in value does not pay tax on that increase until they actually sell that asset. This policy allowed the richest Americans to get richer by minimizing their tax obligations.
What would the taxation of unrealized gains change?
If the bill introduced by Senator Wyden passes, it would put an end to “basic relief,” or the means by which heirs can inherit the assets of high net worth individuals and pay tax only on gains made since the death of the original owner. It has long been a strategy for the rich to get richer by owning assets and financing their way of life by borrowing.
The new proposal would tax unrealized capital gains, meaning the wealthy would no longer be able to defer tax payments on gains made each year. If the proposal were passed, billionaires would be directly affected. Many politicians have strived to ensure fairer taxation for billionaires, or to make them pay their “fair shareâ€.
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According to The Wall Street Journal, Senator Wyden’s proposal would impact only a few hundred Americans who have significant wealth, like Jeff Bezos. Several people have taken to Twitter to question this.
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The proposal did not specify the amount of revenue that a change in this tax policy would bring. However, tax professors and administration officials Biden Lily Batchelder and David Kamin estimated in 2019 that a similar proposal targeting the richest 0.1% of U.S. households would raise around $ 750 million in ten years, report The Wall Street Journal.
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The Institute on Taxation and Economic Policy explained that current tax policy allows the wealthy to defer taxes for years while growing their wealth faster than middle-class individuals. Although unrealized gains are considered “on paper” gains, they generate significant income for the rich in ways not accessible to the general public.
In addition, capital gains tax rates are lower than those for regular income. A House Ways and Means bill suggests raising capital gains tax rates to a maximum of 28 percent, still lower than the maximum income tax rate.
According to The Wall Street Journal, imposing the tax on unrealized gains could be tricky for the IRS, said Andrew Moylan of the National Taxpayers Union Foundation. Part of the reason is the difficulty in assigning a value to illiquid assets.
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