In late August of 2024, Kamala Harris’ Economics Advisor, Bharat Rama, appeared on CNBC, confirming Harris’ intention to tax unrealized capital gains. This disclosure would have been met with universal shock and disgust if only voters understood how this sort of tax works and the havoc it would cause.
Since most people can’t even define plain-vanilla capital gains, few can grasp what unrealized capital gains even means, much less the harm that this sort of tax would cause. What we’re confronting in the Harris proposal is a plan for the government to seize assets on an unprecedented scale—deliberately couched in terminology that most voters cannot understand.
The U.S. government’s finances are already precarious, primarily because the national debt has grown so huge that the interest required to service it now surpasses total U.S. military expenditures. America’s $35.27 trillion national debt works out to more than $105,000 for every man, woman, and child living in the United States. Now consider that, according to the Dept. of the Treasury, the U.S. carries another $175 trillion of unfunded social security and medicare liabilities.
Globalization long ago killed off the United States’ once-mighty manufacturing base. As Bruce Springsteen sang in the mid-1980s:
Foreman said, “These jobs are going boys, and they ain’t coming back.”
Against these challenges, perhaps America’s greatest remaining hope is that it still possesses the world’s most orderly and thriving capital markets. Well-run companies that need money to expand can readily attract it on U.S. markets, thanks to patient investors willing to buy and hold quality stocks and bonds. The money generated by these investments, whether from bond yields, dividends, or increases in stock price, is of course taxed—and this revenue makes up a crucial portion of U.S. government revenue. Initiating a tax on unrealized capital gains would undermine the incentives currently in place that favor the most productive long-term investments, killing the goose that lays the golden egg.
In short, taxing unrealized capital gains may well be the worst idea ever embraced by a major Presidential candidate, and even Americans who don’t normally care about politics should stand up and oppose this measure. Let’s now take a look at what makes taxing unrealized capital gains such a pernicious idea.
How Do Capital Gains Taxes Work?
The US government taxes people on their income. For most people, that’s their salary, their pensions, or their social security benefits. Wealthier people also earn income from their investments. Many investments, such as bank deposits, CDs, and bonds, generate fixed yields. Other investment income might come from renting out real estate, or from owning stocks that pay quarterly dividends.
Investments like stocks, real estate, and Bitcoin also generate one-time windfalls if they are sold at a higher price than when they were purchased. In the United States, whenever you sell these assets at a profit, you’ve generated a taxable “capital gain.” To encourage the sorts of long-term investments that power the economy, the government generally taxes capital gains at lower rates than regular income derived from employment. As long as you hold an asset for longer than a year, it’ll usually receive a preferential “long-term capital gains” tax rate when you finally sell your investment. By contrast, selling an investment less than 365 days after purchase triggers a short-term capital gains tax that’s set at a higher rate.
So every year, when Americans fill out their 1040s, there’s a line for job-related income, another line for pension income, a line for fixed income (think bonds and certificates of deposits), a line for long-term capital gains, and a line for short-term capital gains. This is roughly how things have worked since 1861, since income tax began. Although libertarians typically object to income tax as an immoral government intrusion, the bulk of society doesn’t object to paying taxes on their income—regardless of whether that income’s derived from salary, pension, fixed income investments, or capital gains.
How Are Long-Term Capital Gains Generated?
Whenever the term “capital gains” is invoked, it goes without saying that these gains are realized. That is, you’re paying a tax on the profit you’ve gained by having sold an asset at a price higher than you originally paid. People never bother to use the word “realized” when referring to capital gains, because until now the idea that the government might tax unrealized gains has been crazy-talk.
Here are two simple examples of how realized capital gains work:
- Let’s say you purchase Apple stock at $100 per share, and you hold it for four years. Over that time, the stock steadily moves upwards, and four years later it’s worth $500 per share. Now let’s say you now decide to sell. You’ll have netted capital gains of $400 per share (your $500/share selling price minus your initial cost of $100/share). For the tax year you’ve sold this stock, you’ll need to tell Uncle Sam you’ve made $400 per share from your Apple stock sales, multiplied by however many shares you own. You’ll pay the IRS’s current long-term capital gains rate for these profits.
- Alternately, suppose you bought a house for $250,000. Ten years later, you sell it for $750,000. In this scenario, you’ll owe the government $500,000 in long-term capital gains. If you improved the house during that time by adding something like a patio or swimming pool, you’ll get to subtract that money from your taxable profits.
Now let’s look at how a tax on unrealized capital gains would differ.
How Would a Tax on Unrealized Capital Gains Work?
What makes taxing unrealized capital gains so objectionable? Just one example—and a grossly simplified one at that—should suffice to illustrate the hassles, headaches, and unfairness that these taxes bring. Stay with me here—the example we’re about to review is a little gnarly but I’ve kept things as simple as possible. In the real world, doing the accounting to pay these taxes will be much more confusing than the scenario we’re about to review.
Let’s return to our previous example of buying shares of Apple for $100 apiece, and seeing them rise to $500 over the course of four years. To keep things simple, let’s say the stock went up exactly $100 a year.
After the first year, you’ve made $100 per share on your Apple investment. But you haven’t sold the stock, so therefore you haven’t made any money. Under an unrealized capital gains regime, the government doesn’t care that you haven’t sold your stock for a profit. You’re treated as if you already profited $100 a share, and the IRS requires its share of that profit now.
Hopefully, you’ll have enough cash in the bank that you can pay this tax on your unrealized gains. But any Apple shareholders who don’t have that money will need to grit their teeth and sell some of their stock to pay the tax bill. Imagine how that would make you feel if you loved your Apple investment and expected its stock price to continue going up. You haven’t personally made any money from selling the stock, but now you’re stuck selling some of your shares (diminishing your future profits) in order to pay the government.
If you do sell some of your Apple stock in order to cover the cost of your unrealized gains, now you introduce a second accounting nightmare: next year, you must pay a realized capital gains tax on the shares you’ve sold this year to pay for last year’s unrealized capital gains tax. Your profit from this stock sale went straight to the IRS, your stockpile of Apple stock has been eaten into, and you’ve paid two different types of capital gains tax!
Now it’s year 2, and once again Apple’s gone up another $100, and once again you’ve got to find the money to pay the government for these gains, even though you have no desire to unload your shares. Repeat for years 3 and 4, and you start to see how much time this has taken you, and how much money this has cost you. Bear in mind that under the current capital gains system, there’s no need to report your unrealized Apple gains to the government, much less to pay taxes on this investment, until you actually sell your stock.
If all of this sounds bad, it potentially gets much worse. I hope you’re keeping great records of the realized and unrealized gains you’re paying, because there’s a chance you could face an accounting nightmare thanks to the taxes you’ve already paid on unrealized gains.
Let’s imagine that in year 5 of your stock ownership, Apple’s iPhones start spontaneously exploding, and Apple’s other businesses are beset by a string of serious setbacks. Suppose all these problems cause Apple stock to crash from $400 all the way down to $50 per share. If you already sold a bunch of your Apple stock to cover previous unrealized gains—tough luck, you’re not getting those shares back even though you’re now underwater on your entire investment.
With your Apple stock holdings now in the red compared to your original purchase price, you’ll be needing to file more forms with the IRS to receive a refund on your previous unrealized capital gains payments.
Throughout this example I’ve used just one stock and limited the term to just five years, and reviewing this deliberately simplified scenario probably gave us both a headache. Now imagine the accounting complexity an investor would face if they held twenty different stocks for twenty years. Every year, they’d face a mishmash of realized and unrealized gains and losses for each stock they owned, and the need to keep a running tally of each while paying unrealized gains taxes on some and seeking refunds on others.
Or maybe you bought some Bitcoin that’s up 70 percent since you purchased it. Have fun figuring out how much you’ll need to sell to cover your unrealized capital gains, plus the amount necessary to cover the realized capital gains on the Bitcoin you just sold to cover your unrealized capital gains! The preceding sentence isn’t needlessly wordy nor is it poorly written even though it’s a brutal read—it simply spotlights the exhaustingly recursive thinking that’s invariably necessary to account for paying off unrealized capital gains taxes.
Just imagine the endless hassle and the massive accounting expenses all of this would entail. This isn’t the first time a government has sought to soak the rich using punitive measures, but the traditional approach of simply lining them up against the wall in front of a firing squad and then confiscating their assets is surely cheaper, easier, and more humane.
You can persuasively argue that there’s no such thing as an unrealized capital gain, and that the phrase is a misnomer constructed in bad faith. That is: capital gains only occur when an investment is sold, and the profit is locked in. For the government to go after profits that haven’t even been made is not legitimate taxation, it’s looting.
Other Impacts of Unrealized Capital Gains
Did my simple example of Apple stock seem too convoluted, or did it seem irrelevant to your personal circumstances? Not to worry; you’ll eventually get caught in the net if this thing goes through. Here’s another example of how unrealized capital gains taxes could upend the lives of ordinary people:
One way or another, everybody who owns anything will get pulled between the gears—because that’s what this sort of tax is designed to accomplish.
Even if they don’t trigger a taxpayer revolt, any sort of capital gains tax carries at least an element of unfairness. That’s because stocks, real estate, and other assets tend to increase in price alongside the inflation rate. If the price of your groceries and health insurance increases 10 percent, but so does the value of your home and your stocks, the entire thing is a wash—you actually haven’t gained any purchasing power. Taxing gains that are triggered (and cancelled out) by inflation seems unfair, while assessing such taxes every year—as taxes on unrealized gains would do—is gratuitously demonic.
What’s the Motivation?
Taxes have been around as long as the United States existed, but income tax only began in 1861. Since then, no major politician has ever proposed taxing unrealized capital gains. So why now?
Perhaps this push is motivated by a last-ditch effort to raise cash to bail out a government that’s drowning in debt. But if that’s the case, surely the desire to resort to such unprecedented measures would be accompanied by proposals to relentlessly slash government spending. But when has Harris ever talked about cutting spending? This leads me to believe that the motivation behind her proposed tax is not to rescue the government from the jaws of fiscal disaster.
So what is the motivation? I think it’s ultimately to undermine freedom and to strip people of all property rights—a World Economic Forum-style, “You will own nothing and be happy” dystopia. If taxing unrealized capital gains moves forward, wait until you hear about what will surely come next. Expect the next move to be a wealth tax—enforced by financial surveillance systems that make today’s irritating and counterproductive KYC (Know Your Customer) requirements look tame.
A wealth tax would mark the end of all privacy when it comes to personal property. Such a tax would require you to annually submit a list of every meaningful possession you own, assign a value to each, along with a total dollar value for all your wealth. Better not set your estimate too low, or you’ll risk getting charged with tax evasion. Once you submit a list of your property along with its monetary value, you’ll be on the hook to pay a percentage of its value each year.
Once the government can tax profits that haven’t been made from capital gains that haven’t been realized, it’s just a short hop away from taxing every person of all their wealth. Laugh this off if you want, but five years ago the idea that a Democratic presidential candidate would advocate taxing unrealized capital gains would have sounded equally implausible.
Spiraling Down into Wealth Tax Authoritarianism
Make no mistake: if Harris wins the presidency one of her first acts will be to initiate a tax on unrealized income. Their claim right now is that this tax will be reserved for the wealthy, but that’s just her handlers’ way to quell mainstream opposition and get their foot in the door. Once implemented—like all taxes—it’ll soon enough spread to target all investors:
Americans of every political stripe would be out with torches and pitchforks if they had the accounting background to understand the implications of Harris’ proposal. Luckily, there are strong constitutional protections against such taxes, as well as powerful opponents on both sides of the aisle.
But throw in another pandemic, national emergency, or economic calamity, and maybe in all that turmoil such a tax will be pushed through. Barring an extensive uprising, we’d then be on the road to a wealth tax, and the ultimate seizure of all property by the state. In the years or decades-long interregnum that passes between taxing unrealized capital gains and the ultimate authoritarian outcome, we’d witness an erosion of the integrity needed to maintain and legitimize any sort of financial system.
Any stable financial system relies on investors pouring their wealth into valuable companies and properties, and holding it there for decades. Society as a whole benefits when capital is allocated over the long term in productive ways, instead of thrown away on boondoggles like ghost cities and bridges to nowhere. And for all its faults, that’s what America’s current tax system encourages. But switch to taxing unrealized gains and suddenly America’s best investors will have to divert much of their attention to continually divesting themselves of their core holdings, in order to pay taxes on profits they’ve never actually made.
The sale of these assets to cover this new tax will constantly drive down stock valuations—potentially crashing the market and certainly diminishing tax receipts from realized capital gains. Moreover, it’ll encourage moral decay as top investors shift their focus from seeking out great investments to finding accounting loopholes to evade this unjust tax.
Nobody’s Paying Attention
We can argue whether or not there should be an income tax. We can likewise debate whether this income tax should be a flat percentage for everyone, or whether it should graduate upwards for people with higher incomes. But we shouldn’t be arguing over the legitimacy of a tax on unrealized capital gains. It’s anti-freedom and a form of government-sponsored asset seizure—exactly the sort of move you’d expect from a banana republic desperately trying to grab any assets not nailed down.
You may wonder why the top news outlets are ignoring such a crucial topic. Have you ever heard mainstream media characterize the Harris campaign as politically extreme? The media may constantly brand Trump as a far-right threat to democracy, but nothing can be more overtly authoritarian than Harris’ plan to impose taxes on unrealized capital gains.
I fear we’re hosed, largely because not 1 percent of people have the intellect and motivation to read a piece like this. The vast majority of people are too busy scrolling Instagram or watching Tiktok videos to give this crucial topic any consideration. Whether or not the situation is hopeless, please do your best to get the word out, and just maybe the reptilians won’t prevail.
— DN Comply has also written Bitcoin Basics: Key Information for Beginners.