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Tax on Unrealized Gains

The Biden Administration’s proposal to place a tax on unrealized gains, as detailed in the Fiscal Year 2025 Budget of the United States Government, has sparked controversy. Many label it as a violation of constitutional rights, an infringement on personal freedom, and a convenient way to legally steal from U.S. citizens. This initiative falls within a wider scheme aimed at increasing taxes on the wealthy under the guise of equality.

The concept of the federal government levying taxes on the increased value of assets such as property, stocks, or gold – prior to its sale, although currently directed towards the wealthy, is a dangerous precedent. It could easily set the stage for all assets being taxed in such a manner, no matter what tax bracket an individual falls into. If this were to become a reality, the government could move forward with taxing income that doesn’t exist – money the asset holder doesn’t have in hand. Now, can you imagine the issues, hardships, and confusion this would create?

Such a measure would be unprecedented and unconstitutional, clashing with the principles outlined in the 16th Amendment and the traditional understanding of capital gains.

Tax on Unrealized Gains – An Unethical Plan to Confiscate Phantom Income

It’s argued that this capital gains tax, proposed to address wealth inequality and incentivize more productive economic investment, ignores constitutional limits and could undermine economic growth. There are also concerns that this tax policy could ultimately affect assets owned by the middle class.

A proposed tax on assets that have not yet been sold has many moving parts, and we’ll examine them in detail.

Understanding Their Plan and Reasoning Behind Levying Taxes on Unrealized Profits

The proposed budget outlines several tax initiatives designed to boost revenue and decrease spending by $4.3 trillion over the coming decade, and this includes taxing the wealthy on unrealized capital gains. For those unfamiliar with the existing tax legislation, as well as the proposed tax measure, you can gain some insight from the details spelled out in the General Explanation of the Administration’s Fiscal Year 2025 Revenue Proposals, as referenced below:

Current Tax Law

Capital gains are taxable only upon a realization event, such as the sale or other disposition of an appreciated asset. As a result, the Federal income taxation of the appreciation of an asset that accrues during the asset’s holding period is deferred. In the case of unrealized appreciation at death, the basis adjustment (usually, a step-up) for a decedent’s assets may cause Federal income taxation of that gain to be eliminated entirely.

Proposed Tax 

The proposal would impose a minimum tax of 25 percent on total income, generally inclusive of unrealized capital gains, for all taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) greater than $100 million.

Reason for Proposed Change

Preferential treatment for unrealized gains disproportionately benefits high-wealth taxpayers and provides many high-wealth taxpayers with a lower effective tax rate than many low- and middle income taxpayers. Preferential treatment for unrealized gains also exacerbates income and wealth disparities, including by gender, geography, race, and ethnicity. Under current law, the preferential treatment for unrealized gains produces an incentive for taxpayers to inefficiently lock in portfolios of assets and hold them primarily for the purpose of avoiding capital gains tax on the appreciation, rather than reinvesting the capital in more economically productive investments.

Citizens Taxed on Thin Air in the Name of Racial and Gender Equality – It Doesn’t Add Up

The budget proposal states that the reason for the change is to fix wealth disparities by gender, geography, and ethnicity. This is viewed as a bogus guise to reel in unjustified taxpayer money, and Charles V. Payne hits it on the nail when he posted this on X:

In reality, what will happen is the funds will be redistributed from hardworking, successful individuals to deep government pockets – it certainly won’t level the playing field in any way, shape, or form.

The Wealthy are Accused of Holding onto Assets to Avoid Paying Capital Gains Taxes

The document also accuses asset owners of locking in assets and holding them primarily to avoid paying a gains tax on the appreciation instead of reinvesting in more economically productive investments.

Is this really the primary reason U.S. citizens hold on to their assets? Does this mean real estate investors also hold on to their rental properties “to avoid paying capital gains taxes”? Or are they just trying to build equity and legacy wealth, and keep cash flow coming in as a safety net? Perhaps they intend to keep their wealth in something other than the declining U.S. dollar, that would make sense in today’s economy. And are people holding on to precious metals such as gold to avoid paying capital gains also? Or could they be preserving their wealth in an asset that’s been holding strong for 5,000 years to save for retirement?

Do you think the money they confiscate will really be allocated to “more economically productive investments,” as the document states? If that’s one reason they would like to collect the money, then that’s what it should be used for. However, there’s a high probability that the money will be directed toward funding military conflicts, as well as the program that has facilitated the entry of over 45 million immigrants across the U.S. border, rather than being used to make America prosper.

Market Fluctuations Make it Impossible to Determine Actual Gains in a Given Year

Taxing unrealized gains would also be difficult due to the unpredictable financial markets and economic uncertainties; especially for Wall Street investors. The value of investments can fluctuate based on market trends, geopolitical events, and changes in consumer behavior, making it extremely difficult to accurately calculate how much an individual owes in taxes at any given moment. This could lead to situations where taxpayers are required to pay taxes on gains that may later go on a downward trend or even turn into losses without having actually realized any cash benefit from those investments. Additionally, having to continually reassess asset values and tax liabilities would be challenging for taxpayers and tax professionals.

Why It’s Unconstitutional to Place a Tax on Unrealized Gains

Imposing a tax on gains not yet realized is unconstitutional according to the 16th Amendment, which is:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

In a Supreme Court document, CHARLES G. MOORE and KATHLEEN F. MOORE, v. UNITED STATES OF AMERICA, a summary outlines the argument against considering unrealized capital gains as taxable income under the 16th Amendment:

The Sixteenth Amendment authorizes Congress to tax “incomes, from whatever source derived” without apportionment among the states. Unrealized capital gains are neither “incomes” nor “derived” within the original meaning of the Amendment. Both popular and legal dictionaries from the years around the ratification of the Sixteenth Amendment confirm that point. So does the amendment’s context. And this Court’s near contemporaneous decision in Eisner v. Macomber. All evidence demonstrates that the original meaning of the Sixteenth Amendment is the commonsense one: realization is a precondition for income; money must come into the hands of a taxpayer in order to be taxable “income.” 

Additionally, when it comes to imposing a tax on unrealized gains for real estate, the federal government can’t place a direct tax on property prior to its sale because it’s tied to the idea that direct taxes must be apportioned among the states based on population. This requirement makes it constitutionally questionable for the federal government to directly tax an unsold property.

This protection ensures that states keep the authority to regulate and tax real estate within their territories while the federal government depends on different types of taxes allowed by the Constitution. In simpler terms, the Constitution sets the rules for what type of taxes the federal government can impose, and a tax on a property that has not realized a gain because it hasn’t been sold, is not one of them.

How a Tax On Gains Not Yet Realized Undermines Economic Prosperity

Despite being portrayed as a beneficial move, or even righteous, when the government targets the wealthy, who are key drivers in creating capital and starting new businesses, it can have significant negative economic impacts. If faced with unnecessary and unfair financial losses from taxation on unrealized gains, these wealthy individuals could pack up their capital and leave for more tax-friendly locations.

This short-sighted tax scheme may not only pull the capital needed for startups and investments out of the country, but also lead to clever tax avoidance strategies. As a result, this would trigger a massive loss in tax revenue, making matters worse for a country that’s already in debt for over 35 trillion dollars. Regarding the country’s debt, find out just how bad it really is by heading over to our latest article – A Ticking Time Bomb – National Debt Growing by $1 Trillion Every 100 Days.

The debate over whether it’s a good idea to tax gains before they’re realized is more than just a matter of how the U.S. economy will perform and provide for Americans; it’s also about safeguarding our competitive edge and making sure our economy is viewed as strong in the world market.

Aimed at the Wealthy but Could Expand to Hit the Middle Class

The proposal to tax unearned capital gains might not have the middle class worried because they make nowhere near 100 million. However, once this tax code is set in place, the government may eventually declare that all assets will be taxed before gains are realized, despite income limits – starting with the rich may just be their foot in the door.

It’s also possible that if the wealthy withdraw their capital from the United States, leading to a decrease in tax revenue, the government might declare a national financial crisis. If this were to occur, they could turn to the middle class to fill the gap by taking on the same tax burden they imposed on the rich, all while placing the blame on the wealthy for skipping town.

Taxing the middle class on gains that are not realized would be to their advantage because compared to the wealthy one percent, the middle class makes up a larger portion of the population.

Realized Capital Gains Facing Significant Tax Increases (Assets that Have Been Sold)

In addition to a tax on unrealized gains, the budget also proposes a higher tax on gains that are actually realized. Should this become law, it would elevate the maximum marginal rate on long-term gains and dividends to a staggering 44.6%, the highest rate of its kind in the history of the United States. The tax would apply to those who make at least $1 million a year, which is not really that much in today’s day and age.

A footnote in the FY2025 budget proposal breaks the numbers down and reads:

A separate proposal would first raise the top ordinary rate to 39.6 percent (43.4 percent including the net investment income tax). An additional proposal would increase the net investment income tax rate by 1.2 percentage points above $400,000, bringing the marginal net investment income tax rate to 5 percent for investment income above the $400,000 threshold. Together, the proposals would increase the top marginal rate on long-term capital gains and qualified dividends to 44.6 percent.

Companies and Citizens in Some States Would Lose Over 50 Percent of Their Gains

Under this proposed tax plan, depending upon which state an investor lives in, the combination of both federal and state capital gains taxes could surpass 50%. This is the case with California, which will have a combined rate of 59%, followed by New Jersey at 55.3%, Oregon at 54.5%, Minnesota at 54.4%, and New York state with a rate of 53.4%. Imagine selling an asset for the purpose of using the gains for retirement, only to fork over 50 percent to the government.

As you can imagine, many financial experts don’t agree with this extreme proposed tax hike:

In an interview with Newsweek, finance expert Michael Ryan of michaelryanmoney.com, states “Doubling the top capital gains rate to 44.6 percent could disincentivize investment and entrepreneurship. These are crucial engines for economic growth and job creation. I’ve seen firsthand how lower capital gains taxes motivated my clients to invest more actively in their businesses and take calculated risks.”

Director of Federal Tax Policy at Americans for Tax Reform, Mike Palicz, also commented as he shared his view with Fox News Digital, “This is people’s nest egg. This is them saving, them investing – it’s their American dream. And here is Biden coming out with the highest proposed capital gains tax in 100 years.” 

Director of Communications at Americans for Tax Reform, John Kartch, posted a visual on just how high this tax rate is:

Placing a Tax on an Unsold Asset Shouldn’t be Considered

The Biden Administration’s proposal to tax unrealized capital gains is unconstitutional and unfair. If implemented, this policy could distort investment decisions and potentially extend its reach beyond the wealthy. The bottom line is taxes should be taken on tangible income that has been actually received rather than on estimated potential earnings that won’t be accurate due to unpredictable market fluctuations and economic uncertainties. Along with this, suggesting a 44.6 percent tax rate on assets that realize a gain is downright greedy. What should be proposed are tax policies that help U.S. citizens financially, as well as aim to encourage investment, entrepreneurship, and economic advancement.

For real estate investors, remember, it’s unconstitutional for the federal government to place a direct tax on property that hasn’t been sold. If you have any inquiries pertaining to rental properties and the tax laws that currently apply to them, or you’re interested in obtaining rental real estate to shield your wealth from the declining U.S. dollar, feel free to schedule a call with Morris Invest, a full-service real estate company dealing in lucrative new construction rental properties.

Before you go, dive into the following video, which offers a comprehensive look at the collapse of the U.S. dollar:

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