Unrealized Capital Gains tax

[CRLLS]

So help me understand this. Let's say we implement a progressive tax on wealth with a base (deductible) of $100M. Am I right in thinking it would be fair that would increase to $200M for married filing joint? And what happens when one of them passes? Unlike taxing income, that would just create a bonus for the government . What part of that is fair to the surviving spouse?


WRT diminishing returns stated in # 2 above, are you saying that if the gov finds it to be easier to implement than expected, then the $100M deduction could/should be reduced? (see copyright1997reloaded's comment about magic numbers)


I think that those who feel they are not currently paying their "fair share" should simply write a check for whatever they feel is their "fair" tax and send it in to the Treasury’s Bureau of the Public Debt. They have collected millions from similar generous taxpayers. No need to issue more laws.

 

[Huston55]

I am always intrigued about the OPM (other people's money) mindset, i.e. the I'm in favor (as long as it doesn't impact me).

As Margaret Thatcher once said, "The trouble with Socialism is that eventually you run out of other people's money."

Always a popular Thatcher ‘quote’ (actually a paraphrase) but, it’s not my favorite.

This is my favorite: “In politics, if you want anything said, ask a man; if you want anything done, ask a woman.“ *

* Perhaps this belongs in the “Who Has a Marriage Bio” thread.

 

[Running_Man]

If my portfolio declines like it did last year, can I get a refund of previous taxes paid on unrealized appreciation?

You would gain a loss carryforward to utilize against future gains, no different than companies that are purchased with tax loss carryforwards do now.

 

[Running_Man]

Stock basis can take more than a few minutes to determine if there have been mergers, spinoffs, drips, stock issuance and reverse splits in lieu of dividend payment, etc.

However the bigger issue is that a "mark to market" yearly Dec 31 capital gains tax scheme would introduce a lot of volatility and distort stock prices. Imagine a person who has a large holding in X but was thinking that maybe Y is a better investment. Since they must pay capital gains on X anyway why not sell it now. Trading price is normally set by a natural dance between sellers and buyers while factoring in tax treatement, but if everyone if effectively forced to virtually sell at year end there would be a tremendous increase in volume and price swings in late December of every year. It would be unproductive economically. And what would the government tax coffers do in down years, if there was a prolonged bear market it could effect long term interest rates since the expected revenue is missing.

There is presently much buying and selling of securities around tax time for taxes, most is taking advantage by selling one type of security - say S&P500 fund and taking a tax loss if one has it to offset other capital gains, while buying a similar fund like VTI to replace it so the investment stays in the market while utilizing tax money to fund investments. This is common also leads to the January effect.

 

[Running_Man]

So help me understand this. Let's say we implement a progressive tax on wealth with a base (deductible) of $100M. Am I right in thinking it would be fair that would increase to $200M for married filing joint? And what happens when one of them passes? Unlike taxing income, that would just create a bonus for the government . What part of that is fair to the surviving spouse?


WRT diminishing returns stated in # 2 above, are you saying that if the gov finds it to be easier to implement than expected, then the $100M deduction could/should be reduced? (see copyright1997reloaded's comment about magic numbers)


I think that those who feel they are not currently paying their "fair share" should simply write a check for whatever they feel is their "fair" tax and send it in to the Treasury’s Bureau of the Public Debt. They have collected millions from similar generous taxpayers. No need to issue more laws.

This is NOT a wealth tax, it is a tax on UNREALIZED CAPITAL GAINS TAXES --- People do all they can to avoid realizing gains to avoid paying any tax, it is what most estate planning is done for. Unrealized Capital Gains are no different than realized capital gains other than the tax treatment. If it is different then let's stop all the "how has your portfolio performed this year?" threads. It is how everyone judges their portfolio, I have yet to see the "what are your realized gains for 2018 threads", most here would think that would be an absurd idea, and actually realizing gains is stupid as expending great energy to avoiding taxes is a worthwhile endeavor this would end that process and put more energy into creation of wealth and less into the avoidance of wealth, in the long term. In the short term it would probably cause a market crash.

 

[Independent]

So help me understand this. Let's say we implement a progressive tax on wealth with a base (deductible) of $100M. Am I right in thinking it would be fair that would increase to $200M for married filing joint? And what happens when one of them passes? Unlike taxing income, that would just create a bonus for the government . What part of that is fair to the surviving spouse?

WRT diminishing returns stated in # 2 above, are you saying that if the gov finds it to be easier to implement than expected, then the $100M deduction could/should be reduced? (see copyright1997reloaded's comment about magic numbers)

I think that those who feel they are not currently paying their "fair share" should simply write a check for whatever they feel is their "fair" tax and send it in to the Treasury’s Bureau of the Public Debt. They have collected millions from similar generous taxpayers. No need to issue more laws.

I think this is addressed to me, but I wasn't talking about a progressive tax on wealth. I was talking about reporting unrealized capital gains on your income tax return, instead of waiting for realized capital gains, at least for some portions of some classes of assets. This can be just advancing the tax that will be paid anyway when the assets are sold, but in the case of assets still owned at death, it captures the tax that is currently lost due to step-up.

For the regular income tax brackets, at the low end, the bracket borders for joint are exactly twice the bracket borders for single. As incomes go up, the bracket borders compress. The border for the 37% bracket is 20% higher for joint than for single. So I could see any number between $100 million and $120 million for joint.

Since this is an income tax, I don't see any bigger problems following the first death than we currently have with income taxes. Is our current system "fair" to the surviving spouse?

I'm not saying what future voters would determine. I can say that my vote is for $100 million today.

If I combine reloaded's comment about "other people" and your comment about "simply write a check", I get this result:

1. If the tax doesn't apply to me, I can't say we should increase it because that shows I'm a selfish person who only wants other people to pay taxes.

2. If the tax does apply to me, I can't say we should increase it because I should just voluntarily send a check to the Treasury for the extra tax I would have paid under the new law.

It seems to me that 1 & 2 cover all possibilities. So nobody should ever suggest raising any tax. I don't accept that result. I don't feel bad about talking about taxes.


Regarding 2, gov't should do things that have such large positive externalities that voluntary funding suffers from the free rider dilemma.

 

[Independent]

If my portfolio declines like it did last year, can I get a refund of previous taxes paid on unrealized appreciation?

I agree with Running_man. Note that if we used the three year delay mechanism, this would be relatively rare.

 

[Philliefan33]

From the perspective on an AARP Tax Aide, an income tax on unrealized capital gains would be a nightmare. It’s hard enough to get a confused senior to understand why they have to pay income tax on dividends that were reinvested*, I can’t imagine that we’d ever be able to sufficiently explain unrealized capital gains.

* A typical conversation: TP: “Why do I owe taxes?” Me: “You had $4000 of dividends that is taxable”. TP:”$4000? I never got $4000”. “They were probably reinvested into your stocks, so you never saw it in your checking account, but you still have to pay the income tax on it this year”. TP: “But I didn’t take any of the money”. Me:” you still have to pay the tax”. TP: “This is all so confusing. I thought that once I turned 70 I didn’t have to pay taxes”. Me: “ If you have enough income, you pay taxes until you die. And then maybe you pay them one more time”.

 

[CRLLS]

I think this is addressed to me, but I wasn't talking about a progressive tax on wealth. I was talking about reporting unrealized capital gains on your income tax return, instead of waiting for realized capital gains, at least for some portions of some classes of assets. This can be just advancing the tax that will be paid anyway when the assets are sold, but in the case of assets still owned at death, it captures the tax that is currently lost due to step-up.

For the regular income tax brackets, at the low end, the bracket borders for joint are exactly twice the bracket borders for single. As incomes go up, the bracket borders compress. The border for the 37% bracket is 20% higher for joint than for single. So I could see any number between $100 million and $120 million for joint.

Since this is an income tax, I don't see any bigger problems following the first death than we currently have with income taxes. Is our current system "fair" to the surviving spouse?

I'm not saying what future voters would determine. I can say that my vote is for $100 million today.

If I combine reloaded's comment about "other people" and your comment about "simply write a check", I get this result:

1. If the tax doesn't apply to me, I can't say we should increase it because that shows I'm a selfish person who only wants other people to pay taxes.

2. If the tax does apply to me, I can't say we should increase it because I should just voluntarily send a check to the Treasury for the extra tax I would have paid under the new law.

It seems to me that 1 & 2 cover all possibilities. So nobody should ever suggest raising any tax. I don't accept that result. I don't feel bad about talking about taxes.


Regarding 2, gov't should do things that have such large positive externalities that voluntary funding suffers from the free rider dilemma.

Well I did start out by asking for help in understanding this. Evidently I didn't. I thought you were saying that those with assets/investments (whatever is determined as the base) of 100M would pay the tax on unrealized gain, and those without assets that high would not be taxed. I f that were true, then it would be a tax based on assets but the amount of tax would be determined by income including unrealized gains.

If I understand correctly now, you are suggesting annual income plus unrealized gains of>100M. Is that right?

If this is to get around the step up in basis upon passing, why not work on changes to that and leave everything else as is?

 

[Independent]

From the perspective on an AARP Tax Aide, an income tax on unrealized capital gains would be a nightmare. It’s hard enough to get a confused senior to understand why they have to pay income tax on dividends that were reinvested*, I can’t imagine that we’d ever be able to sufficiently explain unrealized capital gains.

* A typical conversation: TP: “Why do I owe taxes?” Me: “You had $4000 of dividends that is taxable”. TP:”$4000? I never got $4000”. “They were probably reinvested into your stocks, so you never saw it in your checking account, but you still have to pay the income tax on it this year”. TP: “But I didn’t take any of the money”. Me:” you still have to pay the tax”. TP: “This is all so confusing. I thought that once I turned 70 I didn’t have to pay taxes”. Me: “ If you have enough income, you pay taxes until you die. And then maybe you pay them one more time”.

I don't believe there is any overlap between the group of people who use AARP Tax Aides and the group of people who would be subject to this tax.

 

[Independent]

Well I did start out by asking for help in understanding this. Evidently I didn't. I thought you were saying that those with assets/investments (whatever is determined as the base) of 100M would pay the tax on unrealized gain, and those without assets that high would not be taxed. I f that were true, then it would be a tax based on assets but the amount of tax would be determined by income including unrealized gains.

If I understand correctly now, you are suggesting annual income plus unrealized gains of>100M. Is that right?

The wording seems confusing. Is the income tax you pay on CD interest, a "tax based on assets" or a "tax based on income"? I'd say it is a tax based on the income you derive from an asset.

How about our current tax on realized capital gains. Is that a "tax based on assets" or a "tax based on income"? I'd say it is a tax based on the income you derive from an asset.

An example may be clearer than the words. Suppose Andy and Bob each have $200 million in assets. Andy sees an increase up to $230 and the Bob sees an increase up to $210. Andy's tax would be based on his $30 million, Bob's would be based on his $10 million.

It would not be Andy's tax is some rate times $230 million and Bob's some rate times $210 million.

I referred to the $100 million as a "deductible", maybe not the best word. For Andy, you'd pro-rate his $30 million gain between his first $100 million which is exempt from this tax, and the next $100 million. So only 50% of his $30 million would be taxable.

If Chuck has $2.0 billion that grows to $2.3 billion, 95% of his $300 million gain would get into his taxable income.

 

[CRLLS]

It is confusing for sure.

So you are suggesting a tax on unearned income that has an asset entry level of 100M with amortization of gains over the entire asset level. I'd say it is tax on unrealized income with an asset based test.

Suppose that Bob had unearned 30 mil on 50 mil assets (a 40% gain) his tax would be 0
Suppose that Jim had unearned 30 mil on 200mil of assets (a 15% gain) he would pay taxes on 30/200=15 mil.

Jim had bigger assets than Bob. Jim pays a tax and Bob doesn't

Sorry to disagree with you on calling it an asset tax. It is only how that tax is calculated that is in question IMO. If it looks like a duck and quacks like a duck......

 

[Oakster]

I’m all for taking steps toward addressing income inequality but this is a really bad idea.

How do you address income inequality if you cannot make decisions for people? How can you have the right to make choices in your life, but not be responsible for the results? Parents need to teach their children the personal responsibility of their actions and things will get better.

 

[Philliefan33]

I don't believe there is any overlap between the group of people who use AARP Tax Aides and the group of people who would be subject to this tax.

In the article I read, I didn’t see any income threshold in the proposal by Sen. Wyman. We have plenty of seniors coming in with brokerage accounts.

 

[Independent]

It is confusing for sure.

So you are suggesting a tax on unearned income that has an asset entry level of 100M with amortization of gains over the entire asset level. I'd say it is tax on unrealized income with an asset based test.

Suppose that Bob had unearned 30 mil on 50 mil assets (a 40% gain) his tax would be 0
Suppose that Jim had unearned 30 mil on 200mil of assets (a 15% gain) he would pay taxes on 30/200=15 mil.

Jim had bigger assets than Bob. Jim pays a tax and Bob doesn't

Sorry to disagree with you on calling it an asset tax. It is only how that tax is calculated that is in question IMO. If it looks like a duck and quacks like a duck......

I'd call it an "unrealized capital gains tax" like the thread title. But, I really don't care how it's labeled, it looks like we are communicating well regarding the numbers.

I think, whatever the label, it is good public policy. I'd support it the way I've described it.

OTOH, you've got a good point with Bob and Jim. It seems that instead of using an asset threshold, it would be better to use the same thing that we are taxing.

If your portfolio includes more than $100 million in unrealized capital gains, tax the excess. Then the $100 million becomes a true deductible and there is no fooling around with pro rata allocations. (Of course, when the excess is taxed, the cost basis on the taxed assets goes up, and the amount of unrealized gains drops to $100 million.)

 

[Independent]

In the article I read, I didn’t see any income threshold in the proposal by Sen. Wyman. We have plenty of seniors coming in with brokerage accounts.

The only thing I've been able to find "straight from the horses mouth" is this statement from Sen Wyden. https://www.finance.senate.gov/rank...-plan-to-ensure-wealthy-pay-their-fair-share- This very short statement has generated many, many more words of opposition to something that hasn't even made it to the white paper stage.

Wyden has zero detail, but he does specify "millionaires and billionaires". I said that I'd support this if it were applied to the very wealthy, but we don't know exactly what he will propose.

My concern about small investors is partially what people have mentioned - the compliance is too burdensome for the small amounts of money. Also, something that hasn't been mentioned, I think small investors are more likely to sell and realize their gains before they die because the want to spend their retirement money. High wealth people are more likely to hold till they die and avoid capital gains tax entirely.

 

[gerntz]

From the perspective on an AARP Tax Aide, an income tax on unrealized capital gains would be a nightmare.

I think this thread proves you don't need to be an AARP Tax Aide to figure that out.

 

[triangle]

Sen. Wyden prosposal doesn't sound all that different from what I read of Sen E. Warren proposing a 2% wealth tax on assets above 50 Million. Both are effectively a tax on assets though maybe Wyden's effectively grandfathers in all the current billionaires because it proposes to tax the future gains, not the current basis.

I believe either would be very bad policy, causing companies to change how they manage their business..changing how they invest in expanding, borrowing money, retaining earnings or not, etc. Also people with serious assets would leave the country leaving little to be taxed in the next generation. Why would any new business that wanted to sale around the world ever domicile in the US? It would cause capital flight.

IMO a more honest and transparent approach to raise revenue is to raise taxes on everyone in a broad based way (could still be progressive), dismantle laws around charitable trusts that the mega rich use to fund their favorite ideas, increase death tax rates, reduce spending, etc.

 

[pb4uski]

Perhaps it could be called the "Robin Hood" tax.

 

[audreyh1]

In the article I read, I didn’t see any income threshold in the proposal by Sen. Wyman. We have plenty of seniors coming in with brokerage accounts.

He claimed it would only affect the top 0.1% of Americans, so I assume there is some wealth threshold involved. That is a tiny slice of the American tax payers.

 

[Independent]

Perhaps it could be called the "Robin Hood" tax.

Is that title meant to be a criticism or and endorsement?

FTR, I think taxes should be generally "progressive" or "graduated".

 

[pb4uski]

Is that title meant to be a criticism or and endorsement?

FTR, I think taxes should be generally "progressive" or "graduated".

It was a criticism.... and FTR, I'm also fine the progressivity in income tax rates, but at the same time I believe that income should be measured consistently whether your worth is $1,000 or $1 million or $1 billion.

 

[CRLLS]

Since we are in confession, I'll add mine. I believe in a graduated income tax on income, whether that is earned income or via capital gains, dividends, interest, or.... whenever actual dollars are exchanged. Unlike stock values, once dollars are received, that amount cannot be decreased. I do not subscribe to taxing paper gains that can vary from minute to minute. I agree with pb4uski that income should be measured the same for everybody. Nobody gets a pass based on what they have.

On a slightly unrelated note, I also believe that everybody with any income should have to pay some amount of Income tax, even if it is only $10. It includes a person in all parts of "the process".

 

[OldShooter]

Since we are in confession, I'll add mine. I believe in a graduated income tax on income, whether that is earned income or via capital gains, dividends, interest, or. ...

Yes. A stable society probably cannot exist without it.

But here is my hot button: When the politicians, particularly on the left, start screeching about the rich not paying "their fair share," they never say what this "fair share" might be. What they really mean, always, is simply: "more than we're taking now."

 

[ChiliPepr]

Bernie Sanders is also is recommending "taxing earned and unearned income at the same rates" as one part of paying for his "medicare for all".