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Do you have $100 million? I don’t. Heck, I don’t even have $50 million! Which is why I’m not worried about the likes of President Joe Biden and maybe-president Kamala Harris and Rep. Barbara Lee and Sens. Elizabeth Warren, Ron Wyden, and Bernie Sanders—all of whom have proposed various levies on excessive wealth over the past five years—taxing my unrealized capital gains.
I do have unrealized capital gains. Maybe you do, too. My wife and I bought our house in Oakland, California, almost 20 years ago, and it’s worth more now than when we bought it. We also own shares of some stock funds that have appreciated over the years. Those paper gains are “unrealized” because we haven’t sold the assets. Unless they are sold, and the profits “realized,” they won’t be taxed under current law.
This gives America’s richest families a convenient way to avoid income tax. If you, like our thousand-ish billionaires, have vast stock holdings, you can have your tax lawyers and accountants arrange your affairs so as to minimize your realized income. Then, instead of selling long-held assets to fund your lavish lifestyle—and paying a capital gains tax of 20 percent plus a 3.8 percent surcharge known as the Net Investment Income Tax (NIIT)—you simply borrow against your holdings at a few percent interest, tops.
Guys like Bezos and Bloomberg and Buffett (who needs first names?) take advantage of this tactic, which is why ol’ Warren can accurately say he pays a lower overall tax rate than his secretary does. Per ProPublica‘s analysis, the wealth of the 25 richest Americans totaled $1.1 trillion at the end of 2018, but their combined 2018 tax bill? A scant $1.9 billion.
Several of the aforementioned wealth tax proposals, including Biden’s (which Harris generally supports), aim to shrink our obscene wealth gap by taxing the unrealized gains of the super-rich. But the $100 million Biden-Harris cutoff means that fewer than 10,000 people would be affected.
TikTokkers are having fun with this...
The TikTok dad below, Dean, sums up the situation nicely: Taxing unrealized gains “sounds really ridiculous, and it’s very, very complicated,” he says. “But the key thing everyone needs to know, which is why I don’t care about it,” he says, is the cutoff: “I’d love to have this problem. It means I’m freakin’ worth $100 million!”
The people who are freakin’ worth $100 million oppose such a tax, of course. The New York Times reports that a group of venture capitalists calling themselves VCs for Kamala has been whispering in her ear to dissuade her from trying to tax unrealized gains. In a survey, 75 percent of the group’s members reportedly agreed that doing so would “stifle innovation.”
Bob Lord, a tax attorney who advises Patriotic Millionaires, a group of affluent people seeking fairer tax policies, isn’t buying it. Wouldn’t that innovation-stifling argument “apply equally to their realized gains? And to their tax rates?” he asks in an email. “The logic would justify them having a negative tax rate, so we could spur innovation.”
“As I see it,” adds Lord (who helped write Rep. Barbara Lee’s Oligarch Act of 2023, and who has contributed to this publication) “any tax on the ultra-rich is significant to them only for how it impacts their wealth. Taxes don’t impact their spending decisions, their career decisions, college affordability, retirement decisions, or whether a spouse needs to work full time.”
Those taxes also won’t affect you if you have the following issue:
VCs for Kamala did not respond to questions I sent via their media contact, but those rich kids may not have to worry either. Congress has thus far been unwilling to touch unrealized gains, in part because, as Dean noted, it sounds ridiculous—even un-American—when applied to ordinary people.
I know. These aren’t ordinary people. But remember how, when Congress passed $80 billion in funding so the IRS would finally have sufficient resources to go after wealthy, sophisticated tax cheats? And remember how Republican lawmakers, including Donald Trump, widely (and falsely) shrieked that the Biden administration was hiring 87,000 new IRS agents to fan out and harass regular people just like you? Yeah, that was hogwash. But it was politically effective hogwash that helped set the stage for the GOP to claw back tens of billions of that funding as part of a subsequent debt ceiling deal.
Something similar would almost certainly happen if Congress got close to imposing a tax on unrealized gains. It’s simple politics: “We don’t feel in general that it’s fair to tax people when they don’t have the ability to pay,” explains Harvey Dale, an attorney who advises ultra-wealthy clients on tax matters. “Suppose I am a farmer. My family has owned this 1,000-acre spread for four generations, and in a good year I make $30,000 farming. But the land, wow, that could be worth $10 million now.”
(Note: That farmer, lacking $100 million in assets, would be unaffected by the Harris plan.)
The Supreme Court “is all but certain to strike down a tax on wealth, and the wealth transfer tax system we have has effectively been neutered through avoidance strategies.”
One could, of course, write exceptions into the law, “as long as you could figure out what all of those kinds of issues are,” Dale says. Or you could take a different approach: “Why don’t you say, in general, we won’t tax unrealized gains, but we’ll make exceptions and tax them—for example, if the asset in question is freely marketable, like securities, and we won’t do that for people below a certain level of wealth or income.”
As things stand, investors already get a sweetheart deal. When you profit from the sale of an asset today, you pay a far lower tax rate than you would if you made the money by working. Sometimes you pay no tax at all: Uncle Sam, for instance, lets a married couple pocket the first $500,000 in gains from the sale of their primary residence. (Sorry, renters.)
Stock is different. If you sell shares you’ve held at least a year, any profits are taxed at a rate based on your overall income. For 2024, a couple making up to about $94,000 pays no capital gains tax. From there up to $583,750, the rate is 15 percent plus that 3.8 percent NIIT on incomes north of $250,000. Families raking in even more pay 20 percent—23.8 percent with the NIIT.
That’s a great deal for people whose incomes derive largely from investments. It means that a couple with wage income of $1 million in 2024 owes the IRS about $321,000, whereas a couple with $1 million in investment income owes only $181,000. (These simple figures ignore tax credits, etc.)
Why structure our tax code this way? Some people say it’s to incentivize investment, but I’m skeptical. As long as the government isn’t taking 90 percent of your profits, people will keep investing. What else are you gonna do—shove your excess cash under the mattress? Bury it in the yard?
Another rationale, says Dale, who has taught tax at New York University’s law school for decades, involves “bunching.” If my job pays $100,000 a year and I work for five years, I pay 22 percent annually to the federal government. But suppose capital gains were taxed the same as wages. If an investor who’s held a bunch of stock for four years then sells that stock the fifth year for a $500,000 profit, their income is the same as mine, but because it came all at once, their tax rate would be closer to 28 or 29 percent. “So if you want the theoretical justification, it is to average out the bunching,” Dale told me.
For people who make more than $1 million a year, Biden has proposed taxing capital gains at the same top rate as ordinary income—currently 37 percent. Last week, Harris softened that proposal, saying she’d only raise the rate to 28 percent. She and Biden also both seem to support raising the NIIT to 5 percent on incomes north of $400,000. Which means wealthy investors would pay a total of 33 percent on realized gains.
But you don’t make $1 million a year, so never mind.
Trump hasn’t specified his plan for capital gains—maybe, as with health care, he only has a “concept of a plan.” But Project 2025, the Heritage Foundation blueprint created by conservatives from Trump’s first administration, proposes cutting the top rate to 15 percent and eliminating the NIIT. If that happens, America’s one-percenters will pay a tax rate on investment profits that’s less than half the rate they pay on their salaries. And it means wealthy families whose income comes largely from investments will pay a lower tax rate than workers who bring home the nation’s median pay: roughly $60,000 a year.
For hectomillionaires, people with $100 million or more, the Biden-Harris plan would impose a minimum tax of 25 percent on all income, realized and unrealized. But that faces long odds, because even if Congress passes it, the Supreme Court might slap it down.
As the Tax Policy Center’s Steven Rosenthal has written, in the case of Moore v. United States, four of the justices “expressly declared that realization is a constitutional requirement” for taxation. If either Chief Justice John Roberts or Justice Brett Kavanaugh joins with their fellow conservatives, most of those wealth tax proposals would be in trouble.
Lawyers specializing in trusts and estates have long been engaged in “an ongoing, very complicated game to reduce the taxes paid by the wealthy.”
Tax attorney Lord sees a window: “The court is all but certain to strike down a tax on wealth, and the wealth transfer tax system we have has effectively been neutered through avoidance strategies,” he says, “so that leaves a tax on true economic income [including unrealized gains] as the only plausible option.”
Dale says he likes the Harris plan, and “it’s not clear that SCOTUS would declare unconstitutional a 25 percent tax on unrealized gains of people whose net worth is over $100 million, but it’s also not clear that SCOTUS would approve or sustain such a tax.”
That uncertainty, he adds, will affect how Congress views the proposal: “At least some senators and representatives would decide to vote against it because of its possible unconstitutionality. Others in Congress will vote against it because they will dislike such a tax.”
Dale’s NYU colleague, former Biden Treasury official and tax expert Lily Batchelder, is more optimistic about the Supreme Court sustaining a minimum income tax for extremely high-wealth individuals: “The majority in Moore expressed concern about how the petitioners’ arguments would deprive the government and the American people of trillions of dollars in tax revenue by eliminating a vast array of existing provisions, including multiple provisions that already tax unrealized income,” she notes in an email. “I think the case educated the justices about the ‘blast radius’ that would result if they read some sort of realization requirement into the Constitution.”
It’s always been somewhat of a challenge to effectively tax the superwealthy, who wield political power and guard their hoards as jealously as Smaug, the Tolkien dragon. But Congress isn’t without options. It could, as Sens. Wyden and Angus King have proposed, restrict abusive trusts that allow billionaires to transfer massive sums to their heirs without paying a dime in tax. And lawmakers could cap federally subsidized retirement accounts to prevent wealthy retirees from taking excessive government handouts.
They also could do away with carried interest once and for all and strengthen the rules for Roth IRAs—retirement accounts meant for the middle class—that have famously allowed Silicon Valley’s Peter Thiel to parlay a $1,700 retirement fund contribution into billions of tax-free dollars.
And they could, as Biden has proposed, eliminate the socially corrosive “step-up in basis” rule: Suppose your father bought $5,000 worth of stock in 1960 and now it’s worth $5 million. If he dies and leaves it to you, under today’s rules, the “cost basis” of the stock—what it cost him originally—resets to the current market value. Boom! Your family just sidestepped taxes on almost $5 million in investment profits.
His estate wouldn’t have to pay any tax on that transfer, either: As of 2024, the IRS lets a couple give their kids up to $27.2 million, free of any gift or estate tax. This generous exemption is yet another rule that Congress could target. In fact, it’s set to revert to half that amount at the end of 2025, so I guess we’ll see whether our lawmakers will stand up to the oligarchs.
“There are $5 trillion of offsets in the president’s budget that raise revenue exclusively from large corporations and individuals earning more than $400,000 in income,” Batchelder points out. “Every member of Congress has different views about which of these options are most appealing, so the most doable reforms will depend on who are the marginal votes in Congress after the election, but there are many, many options.”
Dale figures the best way to shrink the wealth gap is to target inheritances—closing loopholes, restricting trusts, and generally strengthening the rules on intergenerational wealth transfers, which are taxed at only about 2 percent overall, per Batchelder’s 2020 analysis. The wealth industry will find workarounds, and you’ll never get a perfect system, he says, but you could make inheritance taxes harder to circumvent.
“A nontrivial portion of my practice was estate planning,” a field that has long engaged in “an ongoing, very complicated game to reduce the taxes paid by the wealthy,” Dale says. “It would be sweet, I suppose, to say, here is one simple thing that could be done that your readers can understand. But the loopholes are very, very sophisticated. If I tell you that the right thing to do is to repeal 664(c)(1), your eyes would glaze over. But there are trillions of dollars in that simple thought.”
