Kamala Harris’s Tax on Unrealized Capital Gains
Audio version available here (2 min. 5 sec.)
Vice President Harris continues her presidential campaign as we approach the 2024 election, and she’s unveiled her latest tax plan for the wealthy. In part with current-President Biden’s proposed “billionaire tax”, she pushes for an additional tax on unrealized gains, and not just for billionaires.
Typically, taxes are only paid on income a taxpayer realizes, meaning, the money is tangible. This is enforced against individuals and businesses, like how shareholders of a C corporation tend to pay a ‘double tax’ due to the corporation being taxed on its profits, and then the shareholders being taxed on dividends received from the corporation. However, Harris’s proposal would include taxes on unrealized gains, or money that has not yet been received, such as “stocks, bonds, or privately held companies”.
There has been recent precedent for taxing unrealized gains. Just a few months ago, in Moore v. United States, the Supreme Court ruled that unrealized gains from foreign investments of a pass through company were taxable. The difference in Harris’s plan is that the rule would apply to all domestic taxpayers with a net worth of $100 million or more.
How it works: all individuals worth $100 million or more will need to pay a minimum effective tax rate of 25%. Effective tax rate is the actual percentage a taxpayer pays after taking into consideration all deductions and credits. If a taxpayer’s effective tax rate is below 25%, then taxes will be taken out of the taxpayer’s unrealized gains until the 25% minimum is reached. Taxes paid from these unrealized gains will be credited towards future capital gains tax incurred when the asset used as basis for unrealized gains is eventually sold.
Despite that consolation, this policy would be a compliance headache for taxpayers. It’d also be a nightmare for the IRS. Only in the past year has the IRS ramped up its enforcement efforts to hold high-income taxpayers accountable for their tax liabilities. Add on the logistical nightmare that will be valuing non-tradable assets and unstable revenue, and the plan could end up backfiring.
With this proposal being a possibility for tax law in the future, business owners with high wealth will need effective tax planning to comply and reduce the burden. It won’t be easy without a tax professional by your side, so as we get closer to the 2024 election, make sure you have a tax expert you can trust. For the right guidance, reach out to XQ CPA today.
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