Comment by dragonwriter
6 months ago
> Because taxing unrealised gains are wealth taxes.
No, wealth taxes are a tax on retained wealth (a stock). Taxing unrealized gains is a tax on income (a flow), it just changes the point at which taxation attaches from a realization event to the actual gain.
But you haven't gained... you could be taxed over and over again, and if the stick drops or hits zero then what? It's all on paper and not "real".
> But you haven't gained...
Yes, you have. You have an asset of greater value which you can leverage in a number of ways without liquidating it and "realizing" the gains. That's a real gain, with real value.
> you could be taxed over and over again
Only if you make new unrealized gains.
> and if the stick drops or hits zero then what?
Then you have a negative unrealized gain, or, equivalently, an unrealized loss. If you are taxing unrealized gains instead of taxing gains when realized, then the natural assumption would be, just as is done with taxing gains at realization, that negative unrealized gains are either offset against current income or against future unrealized gains, and so effectively create (considered on their own) negative (current or future) taxes. The simplest form of this is to offset only against future gains, by the simple mechanism that when gains are recognized for tax purposes, they adjust the basis value of the asset, and when unrealized losses occur, they don't effect the basis value at all, so you don't have a taxable unrealized gain again until the market value exceeds the basis value established at the prior peak.
More complex versions would allow you to offset some or all of the unrealized loss from the prior basis value against current income of other forms, but the amount of that offset would reduce the basis value of the asset.
The unrealized value is notional, not actual. This is a very important distinction. The notional value is often not remotely realizable. In many cases, the realizable value can be a tiny fraction of the notional value.
Most laypeople grossly conflate notional and real value. Taxing notional value massively inflates the adverse impact of tax incidence on expected returns relative to people’s casual intuition based on the relative tax rates for realized and unrealized gains.
A tax on unrealized gains is in effect a way of laundering a steep tax rate so that it looks “small” and therefore reasonable to the unsophisticated.
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imo, it's in the best interest of the market for people to have to realize their gains otherwise the price of an item is pretty imaginary if it's never realized.
Gains are frequently not realizable as a matter of law and/or contract, for good reason. Additionally, there are many assets with notional value conditional on not liquidating them, which makes them de facto not realizable. And of course, the majority of assets have no liquidity, so realizability is a practical fiction.
The unrealized values are a fiction. There is significant value in treating values as unknowable when they are, in fact, unknowable. Forcing people to make up a fake valuation creates a lot of adverse incentives.
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