President Joe Biden, Senator Ron Wyden, and other members of the Democrat Party have made the headlines again, but many people will not understand this particular issue, this includes many of the so called "business experts" in the press; therefore a brief explanation may be required for some readers. The headline from many news articles reads as follows: "Biden backs tax on billionaires' unrealized investment gains".
This should frighten anyone that has ever invested in stocks, mutual funds, business partnerships, certain types of real estate investments, certain insurance annuities, or collectable items such as stamps, coins, comic books, etc.
When an individual invests money in something hoping to get a positive return on that investment, there can only be two possible outcomes: either a gain or a loss. For example: Chris invests some money, $10,000, into a company's stock that is listed on the New York Stock Exchange. Chris purchased 100 shares of XYZ corporation at $10 per share. Until the moment that Chris sells that stock investment he has not gained or lost anything, because he still owns that stock and the price could change at any point in time. According to the rules of accounting, any business or individual that issues yearly financial statements must declare their unrealized gains or losses. An unrealized gain or loss is the change in the price of an investment that occurs before that investment is sold; it is a "paper" gain or loss, because the investor has not gained or lost anything as of yet. In the example above, Chris bought 100 of XYZ corporation at $10 per share. If the price of that stock goes to $11 per share, but Chris does not sell it, it becomes an unrealized gain. If the price was to drop to $9 per share, but Chris does not sell it, it becomes an unrealized loss.
The above scenario could be applied to a stamp or comic book collection. If a person buys a rare comic book valued at $1000, and it increases in value to $2000, under this proposed new tax the comic book owner would be required to pay a tax on the increase in value of the comic book; regardless if the comic book was sold or not.
There are several questions about President Biden's idea that everyone should be asking.
- Is this an income tax or a property tax? Income tax is based upon the net amount of income or profit a taxpayer realizes by the end of the year. Property tax is based upon an individual owning something of value: a house, a car, etc. This new tax seems to be an insanely confused hybrid of the two. People will get taxed for owning something that has increased in value on paper, but the owner has not earned even one cent in actual profit.
- Will the taxpayers be allowed to use unrealized losses as offset to their unrealized gains? This is very simple, an investor will win some and lose some. Historically speaking, any tax on gains or profits a taxpayer realizes throughout the year can be reduced by the amount of losses they realized.
- How will this tax be calculated? A company's stock price can change faster than the wind.
- If the taxpayer being taxed for unrealized gains eventually sells the stock for a loss, will the taxpayer be able to recover the taxes he paid on the unrealized gains?
The US Tax Code is based upon the rules of accounting, known as GAAP or Generally Accepted Accounting Practices, and very fortunately for the American taxpayers, there still remain some folks in DC that understand how these things are supposed to work. This proposed new tax violates all sorts of long held principles, rules that are essential for the smooth functioning of economic transactions. Senator Ron Wyden, being the Chairman of the Senate Finance Committee, should know very well that taxing unrealized gains and losses will lead to a disaster of epic proportions. Why would anyone wish to invest in the Stock Market, in real estate, or even in collectable goods, if they are faced with an income tax every time their investment changes in value??
This proposed new tax has gone beyond the point of being ridiculous or silly, to the point at which we must question the sanity of the folks that are supporting this.