Comment by aeonik
6 months ago
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".
6 months ago
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.
> The unrealized value is notional, not actual.
No, its an actual thing, measurable by some mechanism. Otherwise, this would be a non-discussion, as taxing it would be impossible, not a possible thing that we can argue about the merits of.
> The notional value is often not remotely realizable.
Whether it is or is not immediately realizable is immaterial to the desirability of taxing it; it may be material to designing the forms of taxation that should be acceptable. E.g., if the difficulty of realizing the value is, across the tax base, likely to making collecting the tax in cash or equivalents difficult, it would argue for permitting a fallback option for the tax to be collected in-kind, e.g., by the taxing jurisdiction acquiring a proportional interest in the asset equal to the share of the value of the asset represented by the taxes not paid by other means.
> 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.
If you allow carry forwarded losses, even just by the simple method of adjusting basis values, and include taxes on realized gains (and carry forward, offsetting against current income with perhaps a negative net, etc., for realized losses), then taxing unrealized gains is identical to taxing realized gains if the gains are eventually realized, but simply avoids the ability to find maneuvers to benefit from leveraging the value of the asset without paying taxes by avoiding realization. It doesn't make a "steep" tax rate look small, it makes the tax rate look like exactly what it actually is, unlike taxing only realized gains, which makes an effectively non-existent tax on capital gains look like something more, when people can benefit from assets without realizing the gains.
For many assets, like real estate, there are liquid markets with market prices. There are a number of US states that already tax based on real estate value, you can dispute the assessed value but that impacts other things like insured value.
Being difficult to assess value is a problem they’ll make you pay an accountant for and punish you if you get it wrong, it’s not going to stop them.
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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.
> The unrealized values are a fiction.
Then instead of taxing the gains, you'd accept the government nationalizing the assets by eminent domain and paying fair compensation that was significantly less than the "fictional" unrealized value?
Or if someone unlawfully deprived you of the asset, you'd accept as restitution or seek as civil damages for the loss something significantly less than the "fictional" value?
Or, when it was no longer an excuse to avoid fair taxation, would that "fiction" suddenly be a lot more real to you?
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