Comment by BoiledCabbage
1 month ago
> (This is one of the reasons why only the economically illiterate would propose a tax on "unrealized capital gains": that means taxing people for income they have not actually received, but merely could theoretically receive. Which is both immoral and stupid.)
But your statement misses the important point of situations where people use the unrealized gains as collateral for a loan which they then use (for example to live off of). This in fact effectively "realizing" them without paying appropriate taxes on them. As long as gains are purely theoretical and not used for any transactions they should remain untaxed. As soon as they become "active" by being sold, or for example in unlocking additional assets by being collateral for a loan, they should be taxed.
Same concept as a retirement account. You can sell within a retirement account and rightfully don't have to pay taxes because you don't really have "access" to the cash. It's still "locked" within the account. Only when you withdraw to have access to it and make it active/real do you pay taxes. But if you take out a large loan leveraging that retirement account as collateral (or against an unrealized gain) you are not making it active and correctly should pay taxes.
If it's a loan, it must be repaid. At that point, the debtor is going to either sell some stocks, thereby actually acquiring real income (and paying capital gains taxes), or use some other source of cash and not touching the stocks. In the former case, he will pay tax on that income at the time when he actually sells the stocks. In the latter case, he paid taxes on that cash at the time when he received it as income, so it's already been taxed and shouldn't be taxed twice. (Which is why inheritance taxes are immoral — they're double-taxation — but that's a totally separate subject).
As for retirement accounts, same principle applies. Collateral is collateral, it's a contingency. It might or might not ever be touched. If it's touched, then there will be real income involved. If it isn't touched, then there was no income.
But as for the idea of paying taxes on things used as collateral for a loan, that only makes sense if you consider money received as a loan as income. And if you do, you're going to get yourself in serious trouble. LOANS ARE NOT INCOME. They have to be repaid, and they actually cost you money in the long term because you also have to pay interest. If you treat loans as if they were income, you'll quickly find yourself neck-deep in credit card debt and in serious financial trouble. On the other side of the equation, if the IRS were to treat loans as if they were income and tax them (or the collateral used to secure the loan), they would do immense damage to the economy.