4 Reasons Harris’ Proposed Tax on Unrealized Capital Gains Could Hurt Your Investments
Written by
Sean Bryant
Edited by
Chris Cluff
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One of Vice President Kamala Harris’ proposed tax plans is to implement an unrealized capital gains tax for individuals with net wealth above $100 million. With the United States reportedly being home to 37% of the world’s millionaires, around 10,000 wealthy individuals could be met with a 25% minimum tax rate on income over $100 million, including unrealized capital gains.
However, there are some notable issues with Harris’ proposal, which would make it difficult to gain bipartisan support. Here are four reasons Harris’ proposed tax on unrealized capital gains could hurt your investments.
Also see whether Harris might preserve the tax cuts installed by her election opponent, former President Donald Trump.
Difficulty Determining Net Wealth
Harris’ current proposal applies the minimum tax rate on unrealized gains to individuals with a net wealth above $100 million. How is net wealth measured? Does it include goods like a wine collection, luxury vehicles or personal homes? How is net wealth determined for married couples? Is it a flat $100 million regardless of marital status? Would inherited assets that have already been taxed be included? Would foreign assets and digital assets be included?
These are all questions that would need to be solidified before any legislation were to pass. Net wealth is a very subjective term. Some finance professionals include personal assets in the calculation, while others include only items that have identifiable fair market value, such as stock market investments and real estate.
The IRS and legislators would need to put together a listing of every single asset that is included in the net wealth calculation. Not to mention that someone would need to be in charge of verifying the calculations for each individual, making regulation time-intensive and open to subjectivity.
“One of the biggest challenges with taxing unrealized gains is valuing illiquid or private investments,” said Stephen Kates, CFP and principal financial analyst for RetireGuide.com. “These types of investments can fluctuate wildly depending on the prevailing market conditions and don’t always have direct comparisons to offer clear pricing figures.
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“Coming up with massive tax payments on volatile and sometimes dubious investment valuations would be madness. Most individuals, including extremely wealthy ones, don’t have large amounts of cash to send to the IRS based on the changes in their paper wealth.”
Property Valuation Difficulties
Property valuations significantly vary based on source and location. This brings up another potential flaw in Harris’ proposed tax on unrealized gains: How are valuations determined? Would the IRS add a valuation department and conduct on-site audits, or would they rely on the integrity of taxpayers to report correct numbers? How would certain property, such as privately held shares or illiquid securities, be assigned a value?
It’s also important to note that property valuations can vary throughout the year. Under the current proposal, depreciating assets would reduce the net wealth tax until all installments of tax owed on previous unrealized gains were used. Then, the excess would be refunded in cash. Additionally, the proposal takes an individual’s net wealth, meaning debt lowers their calculation. This could result in taxpayers over-leveraging themselves with debt to avoid taxes.
With no outlined cutoff valuation date or definitive valuation guidelines, it would be very difficult to create comparable and fair measurements of who is subject to the unrealized capital gain tax. In addition, it could incentivize taxpayers to harvest losses and take on excess debt to lower their net worth.
Future Tax Expansion
When looking back at the history of taxes, it’s clear that imposed taxes always expand. The United States started tax-free. The first type of tax was an excise tax on goods such as alcohol and tea. Progressively, the tax expanded. Now, most goods and services are subject to tax. The same situation occurred with income tax, which was first introduced during the Civil War and steadily expanded in the early 1900s.
Looking at Harris’ unrealized capital gain tax plan, a similar situation could occur. Even though a small majority of Americans would be subject to the unrealized gain tax, the net wealth threshold could eventually be lowered to encompass more taxpayers, including the middle class. Remember, this tax is in addition to other taxes, like ordinary income taxes, state taxes and sales tax.
“The creation of unrealized capital gains on any level of wealth creates the architecture for it to be applied to any level of wealth when Congress deems it necessary,” Kates said. “This should be avoided. As difficult as it would be for a wealthy person to deal with the tax burden of this rule, the requirements it would place on more average Americans would be punishing.”
Stronger and More Manageable Alternatives
Harris’ proposed tax on unrealized capital gains would present major administrative challenges. What would happen when taxpayers meet the minimum net wealth requirement on paper but have no cash to pay the tax bill? Who would enforce the requirements, verify the taxpayer’s net wealth and value assets? The IRS is still processing relief payments and aid from 2020, meaning it most likely does not have the capacity to expand enforcement.
With the high administrative burden, there are better revenue-raising alternatives that eliminate a headache for the government or individuals. This could be reworking the federal budget, increasing tariffs, bringing back more domestic jobs to reduce imports and altering payroll taxes. There are plenty of more manageable and stronger alternatives than Harris’ tax on unrealized gains.
“There are many options for increasing taxes on wealthy individuals that don’t involve a new and onerous tax scheme,” Kates said. “Raising existing tax rates, such as income taxes or normal capital gains rates, would be more logical. Even shutting down other loopholes in the tax code, like lowering the estate tax exemption or eliminating the step-up in basis at death, would be a more convenient strategy.”
Editor’s note on election coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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