Unrealized Capital Gains tax

[clifp]

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Originally Posted by SecondCor521 I've been saying a number of things: 4) Most importantly, there is little to nothing to prevent any given American from doing the same things that wealthy Americans have done in order to grow their wealth. There is no law that says that only rich people can buy startup stock in their IRA, or that you have to have a net worth of $X million in order to open a GRAT. Wealthy people get that way by providing services and products that are of value to a large number of people, and/or by investing wisely or luckily, and then preserving that wealth through clever but legal use of our current tax laws. Although the wealthy do have some inherent advantages of wealth, such as being in the same social circles with other wealthy people and having the funds to hire excellent CPAs and attorneys, I don't think this isn't the main way they make money. Although exceptions exist, I believe most wealthy people do not get that way (and stay that way) by secret or "rich people only" methods or by lying/stealing/cheating/defrauding.(*) To believe the latter subjects a person to being defrauded of their money by "I'll reveal the secret to achieving wealth" charlatans. I think it is also counterproductive because it promotes a victim mentality - "I can't get rich because I'm not already rich so I can't use the secret rich people methods."

It is very difficult for somebody who isn't an accredited investor (aka rich person) to buy stock in a private company period. (IRA can impose even higher standards). As GreyHare points out, if you are really rich like a partner in Bain Capital you have even more opportunities to take advantage of differences in pricing.

Plus most of the time it is not even intentional fraud. Outside of public markets, there is a wide discrepancy between prices in virtually all assets. Real Estate, the more specialized the bigger the spread. Art, private business, patents, bond values of companies in bankruptcies or Venezuelan bonds. A spread of 2x between what a buyer and seller think something is worth is not uncommon and even 10x is unheard of.

To me that's one of the most problematic issues with any type of wealth tax.

[SecondCor521]

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Originally Posted by GrayHare SecondCor - you seem hung up on this "can't put stock into IRA" thing, but that hardly matters when the share price can be anything you want. To illustrate: I form corporation A, you form corporation B. I use my Roth IRA funds to buy $5000 worth of shares in your corporation B, that can be 1 share or 1 trillion shares, it does not matter. You use funds in your Roth IRA to buy $5000 worth of shares in my corporation A. Next, I buy back your shares of my corporation with my non-IRA money for $1 million, and you similarly buy my shares for $1 million. Just like that each of us has effectively transferred $1 million into our respective Roth IRAs. Yes, if the IRS gets wind of this simplistic scheme they will likely shoot it down. A more complex scheme can achieve the same result and be much harder to shoot down, and that's what the big wigs do.

Emphasis added.

I can be pedantic, argumentative, and stubborn, often all in the same day.
The point about putting stock in an IRA was more of a pedantic thing, and not really very important in the scheme of things.

The more important issue to me is item 4 about how some people think that rich people mostly get ahead by cheating/bending rules/etc. It's a free country, and people are obviously entitled to their opinion in general and specifically on this board. I simply strongly disagree with how the vast majority of wealthy people manage to get that way.

As information supporting my opinion, I gave two counterexamples of where fraudulent behavior doesn't work to achieve sustainable wealth in my previous post. I also can point to the work in the Millionaire Next Door books which describe common traits of millionaires to decamillionaires - my recollection of that book is that rich people get that way through a lot of honest hard work, frugality, and investing well over time, not through tax fraud as alluded to with your example above.

As an additional set of information I could add my personal experience. I've met and known a variety of wealthy to very wealthy people ($1M - $1B). While some have been a tad eccentric, all were uniformly excellent human beings who treated other people with decency and respect and usually great care, were respected members of their community, and as far as I knew conducted their financial affairs with integrity and honor.

You might point out that there could be a difference between those folks and the ultra ultra rich (Musk, Buffett, etc.). To that I might reply that although that may be so, I suspect that the number of millionaires to decamillionaires probably vastly outnumber Musk/Buffett/Bezos types. That, plus the fact that most Musk/Buffett/Bezos types also seem to achieve wealth through valuable businesses and/or talented investing over time, means there's not a lot of wealthy people left over who get that way through cheating/crazy tax schemes/etc.

Quote:

Originally Posted by clifp It is very difficult for somebody who isn't an accredited investor (aka rich person) to buy stock in a private company period. (IRA can impose even higher standards). As GreyHare points out, if you are really rich like a partner in Bain Capital you have even more opportunities to take advantage of differences in pricing. Plus most of the time it is not even intentional fraud. Outside of public markets, there is a wide discrepancy between prices in virtually all assets. Real Estate, the more specialized the bigger the spread. Art, private business, patents, bond values of companies in bankruptcies or Venezuelan bonds. A spread of 2x between what a buyer and seller think something is worth is not uncommon and even 10x is unheard of. To me that's one of the most problematic issues with any type of wealth tax.

This is a good legitimate example of a case where rich people can do something that poor people cannot - only accredited investors can invest in certain things, and accredited investors I think have to have a certain amount of wealth. Thank you for the example.

[triangle]

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Originally Posted by Running_Man If you sell the stock the basis is the year end price, you would have realized gains or losses on the stock you sold and unrealized gains on the stocks you hold. This is no more difficult than it is to value stocks you purchase now, does anyone really have difficulty determining their basis in a stock investment? Is this really a term investors do not comprehend? This is certainly less complicated than fixed assets in a business. I am amazed it is not understood how easy it is to compute this.

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.

[pb4uski]

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

[Independent]

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Originally Posted by copyright1997reloaded 1. How does one know if the net worth is over your magic number ($100 million) without doing appraisals? 2. If it is important to do for those over your magic number, why is it not good to do for those at $50 million, or $25 million, or even those poor slob $1 million dollar rich? 3. 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).

1. If art and collectibles aren't included for calculating capital gains, then they aren't included for determining the $100 million threshold (note, btw, that I envision the $100 million as a deductible, not a cliff). If they only need to be appraised every __ years for capital gains, then they only need to be appraised every __ years for determining the threshold.

2. Diminishing returns. Yes, this generates additional administrative cost for taxpayers and the gov't. It's easier to get an acceptable ratio for bigger portfolios. If it turns out to be easier than expected, future voters may want to lower the threshold.

3. I think we should fund the gov't with progressive taxes. I've earned more than most Americans over my lifetime, therefore I think I should pay higher tax rates (not just dollars, but rates) than most Americans. This doesn't bother me.
Similarly, I think the smaller number of people who have done better than me should pay higher rates than I do. You seem to think there is something wrong with this attitude. I don't see the problem.

[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]

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Originally Posted by braumeister Quote: Originally Posted by copyright1997reloaded 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]

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Originally Posted by pb4uski 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]

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Originally Posted by triangle 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]

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Originally Posted by 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.

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]

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Originally Posted by 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.

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]

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Originally Posted by pb4uski 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]

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Originally Posted by Independent 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]

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Originally Posted by 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”.

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]

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Originally Posted by CRLLS 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]

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Originally Posted by steelyman 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]

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Originally Posted by Independent 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]

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Originally Posted by 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......

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.)