Are U.S. Lawmakers Consider Taxing Billionaires on Unrealized Capital Gains?

Billionaires tax on unrealized capital gains

Congress is trying to put a budget together to pay for specific social policies, including climate change. To pay for the ‘build back better plan’, there are several items on the agenda, including more vigorous IRS enforcement, as well as a capital gains tax on billionaires. The new annual tax will be on unrealized capital gains but likely exclude any taxes on stable coins or Bitcoin trading.

What is Congress Cooking Up

The Senate Finance Committee is poised to propose an annual tax on unrealized capital gains. This tax will be levied on Billionaires that hold liquid assets. The tax will not be a wealth tax or a billionaires tax, but something monitored like capital gains. The National Taxpayers Union has objected to the tax on billionaires’ unrealized capital gains, creating chaos and generating new burdens for investors.

How Will The Tax Work?

The concept of unrealized gains focuses on market-to-market accounting. Bitcoin trading is a perfect example. Every day, the price of a Bitcoin changes, and you have a valuation of your portfolio. Currently, governments will require that you pay taxes on your Bitcoin trading when you sell your Bitcoin. In some instances, if you purchase with your Bitcoin, it’s considered a sale, and the price on the day of that purchase is your sales price. The sale of your Bitcoin is a realized gain. You might have purchased the Bitcoin with a sovereign currency, and after the price of Bitcoin increased, you could have bought an accessory. This scenario would be a realized gain.

The tax that is possibly being proposed in the U.S. Congress would impact people with $1 billion in assets or $100 million in income for three consecutive years. This tax would only affect a narrow group of people at the upper end of the wealth scale. The tax would not be on realized gains that you might have when Bitcoin trading but instead affect unrealized gains or mark-to-market gains. The date at which you are subject to the increases is yet to be determined. For example, on December 31, the IRS would value your Bitcoin holdings, and if you had gained from Bitcoin trading on that date, you would pay tax for the difference between the value of Bitcoin and your purchase price.

Change to the valuation date could generate strong movements in the price of assets around the valuation date. A scenario could exist where the price of Bitcoin could surge higher into the end of the year; a tax would be levied, and Billionaires would need to pay a tax based on the close on that specific date. Their paid taxes would not be subject to review again until the next mark-to-market date, which could be the following December 31. As you can imagine, this could create an entire industry around creating market-to-market losses that would offset the mark-to-market gains billionaires experience on or before a specific date.

The tax bill in the Senate seems more progressive in that it would focus on raising money for those who are very rich. Those in the House of Representatives are concerned about whether it makes sense to add a novel idea at this late stage to a bill that is nearly over the finish line.

What is at the Center of the Issue?

It is not clear whether the U.S. Constitution gives Congress the ability to tax based on wealth. The goal of this bill would be to tax Billionaires a long-term capital gains tax of 23.8% for mark-to-market gains on liquid assets whether they have been sold or not. This situation means that Bitcoin trading could be considered under this new law. Additionally, the Constitution saw that States must pay taxes based on their congressional allocation of seats in the House of Representatives. This situation might be impractical as most of the Billionaires live in New York and California. There is no similar exception to this law for wealth only for income which creates an additional problem. The constitutionality of the current law would then bring challenges to the U.S. Department of Treasury. This situation would mean the law would eventually be brought in front of the United States Supreme Court to determine if it is constitutional.

The Bottom Line

The upshot is that Congress is considering a wealth tax to pay for new social and environmental programs, including infrastructure. The tax is expected to be on unrealized gains on tradeable products. Congress would need to determine the specific date on which they will measure any mark-to-market gains or losses. It is unclear if a tax like this is constitutional. It’s also unclear if there are mark-to-market losses a Billionaire will recoup the tax liability they paid.