Posted on 01/26/2021 9:35:30 AM PST by amorphous
Newly-inaugurated President Biden is likely to take office and push for a flurry of new legislation. Yet while all eyes will be on Biden’s proposals for COVID-19 relief, healthcare policy, and undoing the 2017 tax reform law, two other dangerous ideas are flying under the radar.
The first of these is a proposal to implement a so-called “mark-to-market” regime for taxing unrealized capital gains. Currently, taxpayers pay tax only on “realized” capital gains — in other words, when the asset is sold and you bank a profit. Though its on-paper value might fluctuate during ownership, only when an asset like stock in a publicly-traded company is sold is the taxpayer liable for tax on the realized capital gain.
But a proposal championed by the incoming Chair of the Senate Finance Committee, Ron Wyden (D-OR), would change this. Under Wyden’s proposal, taxpayers over a certain income level or with qualifying assets exceeding a threshold would be expected to pay taxes on increases in the on-paper value of assets, even if the capital gain was unrealized.
A mark-to-market system presents many challenges that make clear why such a system hasn’t been implemented in the past. First and foremost, valuation of non-liquid assets can be complex. Assets such as stocks can be valued fairly easily, but others, like artwork or jewelry, may require appraisal. The administrative burden of ensuring accurate valuation of a diverse array of assets — and the opportunities it provides for gaming the system — may outweigh the revenue raised.
Another issue with the idea is that a mark-to-market regime would unfairly burden upstart investors. For example, many young businesses are “cash-poor” as they invest in fully establishing themselves. As a result, owning a share of such a company could generate a significant tax bill without the corresponding cash to pay it.
This could lead to some entrepreneurs being forced to sell part of it off prematurely in order to pay the tax bill arising from their unrealized capital gain. A “lookback period,” whereby an investor could delay payment of tax until the gain is realized but suffer a penalty as a result, eases the burden somewhat but also biases the system toward cash-rich investors and introduces more administrative complexity.
Lastly, any mark-to-market system would have to deal with capital losses. After all, an asset with a starting basis of $30 that grows to $80 over the course of one year would face taxes on a $50 capital gain under a mark-to-market system. But if that same asset dropped back down to a value of $20 the next year, the investor gained nothing — overall, they lost money! Any fair tax system would give that investor the ability to offset gains with losses, as is generally the case elsewhere in the tax code.
And a mark-to-market system isn’t the only half-baked tax idea coming out of the Beaver State. Congressman Peter DeFazio (D-OR) has introduced legislation for an idea backed by President Biden — a financial transaction tax (FTT). FTTs are often presented as a tax on Wall Street day traders, but the fact is that the harmful effects would be far-reaching.
FTTs violate one of the most basic rules of tax policy — that the same income should not be taxed multiple times. FTTs tax financial trades, placing another tax on top of existing taxes on capital gains and corporate income. Tax pyramiding obscures the impact of taxes on taxpayers while creating situations where taxpayers have to pay taxes on taxes that were paid during a previous stage.
And the poor design of FTTs are one of just one of their problems. By punishing investors, FTTs would effectively increase the cost of raising capital as well. This would make it more difficult for businesses to fund investments — something tax policy should be facilitating, not hampering. FTTs would also be distortive, arbitrarily targeting assets that are more frequently traded over less-frequently traded assets.
While a mark-to-market system and an FTT might be popular in the new Congress and could very well become law in some form, they’re far from good policy. While the headlines focus on flashier issues, taxpayers should beware efforts to establish complex new taxes that could prove expensive and harmful to the economic growth we’ll need to address the COVID-19 crisis.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.
Somebody should tell Mr. Wyden he forgot to put in the loophole for Gates, Bezos, Buffett and Zuckerberg.
Musk would probably move and buy his own country.
I caught some of it. I don’t trade stocks, anymore, but I do play in the crypto markets some.
Two Oregon radical left, antifa supporting, Congressmen propose radical tax system - So surprising!
Based on current Market Conditions, the Value of my Ammunition is much higher than it was when I purchased it.
Anyone know which Tax Form I report that unrealized Gain on?
I won’t be selling that Asset. Could be a 1040-.556 Form.
I am convinced that most Dems are economic illiterates. Those that aren’t that stupid are, instead, willfully trying to destroy the US economy.
Here is a simple, iron-clad, rule of Economics: If you tax something, you get less of it. Taxing capital, as this proposal would do, will significantly reduce the stock of capital in this country, leading to lots less innovation, less profits and less taxes. If the Dems’ goal is to raise more taxes, they would be far better served by lowering tax rates and reducing regulations, thereby giving economic growth a substantial boost. But then they’d be Republicans.
GME
Anything you would pay capital gains on. Yes, stocks, bonds, real estate, equipment, timber, ...
Well on Monday I purchased 1000 shares of Tesla, then on Tuesday I took out options on 10,000 shares of Tesla, Wednesday the stock went down, so I purchased another 2500 shares, but on a Thursday I gifted 500 shares to my university and 100 to my mom. Friday Tesla went up at the start of the market, but after the close Tesla got hammered in Asia trading. So Mr CPA what’s my tax?
If something like the above becomes law, there will necessarily be some threshold of when unrealized capital gains will need be reported/taxed. For the sake of argument, let's say it's $600 - which also must be determined. As someone upstream said, accounting will be a nightmare.
Likely this proposal is just a stalking horse to trade away for a higher cap gains rate.
Dang, I’ve got some ancient stock that has huge unrealized capital gains. That would force me to sell it off to move everything into cash.
The yacht tax was only on new yachts built in the United States. Yachts built in foreign countries and then registered in say the Cayman Islands were not subject to the tax. Also, I do not believe used yachts were subject to the tax either.
It should also be inflation indexed.
For instance say someone bought Coke for $20/share in the year 2000, it’s $25 now (I don’ know the actual price), getting taxed on $5/share gain doesn’t account for the 20 years of inflation. Probably no nominal gain at all yet you’d still get taxed on that.
So if you inherit a farm and the next year the tax assessment goes up would you pay tax on the difference between the assessed value of the farm at the time of inheritance and the new assessed value?
Not the way they plan on doing. If you have any money, send it. If not send some anyway.
It was a stupid idea
“I caught some of it. I don’t trade stocks, anymore, but I do play in the crypto markets some.”
Yeah. That should be fun for anyone who got in early and decided to hodl. Everyone who’s up will need to liquidate crypto to pay taxes on MTM appreciated value which will in turn drive down the value.
Next up unrealized income gains.
= = =
Like that $1400, after the $600.
Or like $15 per hour.
Meant for consumption by useful idiots. The folks at BlackRock will grease Biden palms as much as needed to make sure this doesn’t happen.
Yeah, they are in that deep.
Unrealized capital gains would be calculated at the end of a tax period, quarterly in many cases. Some market value would be assigned - left for you to do the calculations - don’t get it wrong, as you are the one ultimately responsible for the accuracy of your tax return and the one penalized if you do get it wrong. Severe penalties will be applied if intentional, and you’re guilty until you prove you’re innocent at the end of a long and expensive court proceeding. So, most plead guilty in return for a lesser penalty. Keep good records, be able to account for basis, etc.
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