Plans for Tax

[Burning Petard]

Trump has posted that the 'rich and famous' who support Harris are stupid. Maybe. Maybe the rich and famous who endorse any politician think the rest of us are stupid. But anyway, Trump was decrying a Harris proposal for taxing unrealized capital gains. I heard about this a week ago from a 'small business man' I have not seen anything about such a proposal from the Harris camp. So does she or doesn't she? I don't know, but I am interested in the idea.

The idea is that when the market value of an investment goes up and you hold it, you have an unrealized capital gain, You actually 'realize' the gain when you sell it. At that time you owe tax on that gain. Is it fair to tax it before you sell it? Most of the country must think it IS fair, because that is exactly how property tax works in most of the country. Purchasing a home is the biggest investment most of us make. Owners pay a 'property tax' based on the value of the property. It is always a hot political potato to establish the process for determining that value. When the value goes up (that's an unrealized CAPITAL GAIN) one's property tax goes up. Except for the reality that few actually enjoy paying tax of any kind, what is the philosophical argument that tax on my investment in Amazon stock should be taxed by a different process than my investment in real estate?

snailgate.

[datsunaholic]

From what I've read the idea behind taxing unrealized capital gains is that most wealthy folks don't sell those stocks, etc for money. They use them as collateral for loans to get cash, and then use the loans as tax deductions against any actual income they make. Since much corporate compensation is in stock and stock options that aren't taxed as income until one sells them, they don't usually have the taxable income that one would expect.

[Joe Guy]

I read a couple of places that the unrealized capital gains tax being discussed would only affect people with a net worth of over $100 million. I'm not too concerned about it at the moment. I suppose I might change my opinion if I decide to invest in a lottery ticket and win big.

[Sue U]

The analogy to property tax is not a very good fit, for a host of reasons but mainly because property taxes are not really pegged to the market value of property; the "assessed value" (for residential properties) is generally calculated only as a combination of square feet of living space and size of the lot, regardless of where the property is located or any other factor affecting market value, and the "millage rate" is calculated according to the needs of the municipal taxing authority's budget. Property taxes do not rise or fall with the housing market, but with the budgetary needs of municipal government. Also, when you sell your home, you will be taxed on the sale as a capital gain unless you roll the cash received into a new residential property (or take the one-time-only capital gains exclusion for sellers 65 and older).

Of course I'm all for soaking the rich, but I don't think there is really a need to tax unrealized capital gains; I do think capital gains should be taxed the same as ordinary income on sale of the asset, and not given preferential treatment with a discounted rate. But there are other, simpler ways to avoid the problems associated with using capital assets as collateral for "loans" in lieu of "income": for example, you could simply tax the value of the loan secured by capital assets, since it is in essence "cashing out" some portion of the asset (although with a contract to effectively buy it back).

[Big RR]

Sue--I was thinking the same thing, and the tax paid could be a credit against any capital gains owed on sale. But rather than go after this, I'd rather see the stepped on basis on death abolished for capital assets, which is a great benefit to the rich. So, the estate of a middle class person with, say, $50,0000 in bonds or CDs would pay income tax on the accrued interest after death, but if it were in a capital asset, the gain would pass to the heirs income tax free as the basis is stepped up to the market value at the time of death. Of course, many wealthy people might have stocks many, many times that $50,000, but the income still is not taxed.

[Sue U]

Sue--I was thinking the same thing, and the tax paid could be a credit against any capital gains owed on sale. But rather than go after this, I'd rather see the stepped on basis on death abolished for capital assets, which is a great benefit to the rich. So, the estate of a middle class person with, say, $50,0000 in bonds or CDs would pay income tax on the accrued interest after death, but if it were in a capital asset, the gain would pass to the heirs income tax free as the basis is stepped up to the market value at the time of death. Of course, many wealthy people might have stocks many, many times that $50,000, but the income still is not taxed.

I can see the benefit of the basis step-up at death, particularly where the asset is something like a family farm or business being passed down to the kids. But I would impose a 100% estate tax after the first million or two devised. Obviously, there are a variety of tools in the tax kit to get to similar policy results (that was my favorite part of the tax program in law school).

[Big RR]

One way to remedy that is carry the original basis forward and assess the income on the gain when the shares or equity are sold (and I also would guess most capital assets are not ownership in a family business but share in a a variety of businesses; why should the income taxes be different if the parent sells the shares (or family business) first and the kids get the money than if they inherit the business and sell afterwards.

[Burning Petard]

I see alot hand wringing and alligator tears about the heavy tax burden of 'the old family farm' when grandpa dies. The reality is that grandpa is still the owner because he does not trust his kids with the asset and the kids don't want to be farmers anyway.

snailgate.

[Jarlaxle]

I see alot hand wringing and alligator tears about the heavy tax burden of 'the old family farm' when grandpa dies. The reality is that grandpa is still the owner because he does not trust his kids with the asset and the kids don't want to be farmers anyway.

snailgate.

That's idiotic.

[ex-khobar Andy]

I understand the point about unrealized capital gains. After all, probably most of us have a house or a bracelet or a coin or whatever that is worth more than we paid for it: and why pay tax on it when it is just sitting there. But as soon as it is used to secure or guarantee a loan its value is realized in my view, and should be taxed at that point. Keeping track of the basis - i.e. the value at each point from purchase, through use in securing a loan, to eventual disposal of the asset, really should not be a problem.