Should the Government Tax Unrealized Gains?

Key Takeaways

• President Joe Biden has proposed a 25% minimum tax on the unrealized gains of people who own $100 million in assets or more.
• Republicans adamantly oppose the tax and have criticized Vice President Kamala Harris, the Democratic presidential candidate, for supporting it.
• Currently, you only have to pay taxes on your investments when you sell them.

A longstanding proposal by the administration of President Joe Biden has revived the debate over whether the government should tax investment gains that exist only on paper.

The proposal to tax unrealized gains has drawn fire from Republicans, who are criticizing presidential candidate and Vice President Kamala Harris for backing Biden’s proposed policy. Republicans say the policy would discourage investment and slow economic growth—but some critics leave out the fact that it would apply only to people who are already extremely rich.

“Think about even everyday Americans across this country,” former Republican presidential candidate Vivek Ramaswamy said on CNBC earlier this month. “That means that if you’re a farmer, or if you’re a small business owner, you will owe taxes with cash you literally do not have in your pocket to pay those taxes.”

Who Would a Capital Gains Tax Apply to?

This is true to the extent that the wealthiest 0.01% are “everyday Americans.” The proposal, put forward as part of the administration’s 2025 budget, called for a “billionaire tax.” The 25% minimum tax would apply to the unrealized gains of people who own $100 million in assets or more—only 9,850 people in the entire country, according to an estimate by wealth advisory firm Henley & Partners.

The proposed tax is aimed at reducing wealth inequality. Because billionaires grow their wealth not by salaries and wages but by the value of their investments rising over time, the Biden administration argues that the current tax code allows “many of the wealthiest Americans to pay lower rates on their full income than many middle-class households pay.”

What Would Change Under the Proposal?

Currently, you only have to pay taxes on your investments when you sell them, paying a rate based on how much value your assets gained when you owned them.

Critics of a wealth tax, including the Libertarian Cato Institute, argue that taxing unrealized gains would be “economically destructive.” Opponents say it could lead to odd situations such as the government having to pay the likes of Elon Musk a large tax rebate when the value of his assets goes down.

Economists have debated the pros and cons of a wealth tax, and any proposal would still have to get through Congress—something the Biden administration has been unable to do as of yet.

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Conclusion

The debate over whether the government should tax unrealized gains has resurfaced with President Joe Biden’s proposal for a 25% minimum tax on the unrealized gains of individuals who own $100 million or more in assets. While Republicans argue that this tax would discourage investment and hinder economic growth, it’s important to note that it would only apply to a small fraction of the population—9,850 individuals, to be exact.

The proposed tax is part of the administration’s efforts to address wealth inequality. By targeting billionaires who accumulate wealth through investments, the Biden administration aims to rectify the current tax code, which allows many of the wealthiest Americans to pay lower rates on their income than middle-class households.

Currently, individuals are only required to pay taxes on their investments when they sell them, based on the gains they accrued during ownership. Critics of a wealth tax argue that taxing unrealized gains could have negative economic consequences, such as the government having to issue tax rebates to individuals like Elon Musk when the value of their assets decreases.

Ultimately, the implementation of a wealth tax would require congressional approval, and its fate remains uncertain. As the debate continues, it is crucial to consider the potential impact on wealth inequality and economic growth.