Controversial Proposal to Tax Unrealized Capital Gains Causes Political Stir

U.S. Democratic presidential hopeful Kamala Harris has stirred controversy with a proposal to tax unrealized capital gains for the wealthiest Americans. The plan has come under fire for both political and practical reasons and raised questions about whether the policy could make its way to Canada.

The Financial Post’s Barbara Shecter looks at the possibility of capital gains tax contagion.

What are unrealized capital gains?

Unrealized gains are earnings that accrue as a result of an increase in value on such assets as stocks or real estate holdings. Capital gains can be measured over a specific time period but are normally only taxable once the underlying asset is sold or disposed of in some other way, such as a charitable donation.

How would taxing them work?

This plan would see such gains assessed annually, even if the asset in question isn’t sold by the investor or owner. The proposal, first laid out by U.S. President Joe Biden in March, indicated that such taxes would be treated as prepayments against future realized capital gains to avoid taxing the same amount of gain twice.

Who and what would be affected?

So far it looks like individuals with a net worth (assets minus any liabilities) of $100 million or more. The proposal would impose a minimum tax of 25 per cent on total income for such individuals, “inclusive of unrealized capital gains.” Some company founders may be eligible to be treated as “illiquid,” and therefore taxed only on unrealized capital gains on “tradeable” assets.

What’s behind the proposed changes?

The Democrats say current rules on capital gains give wealthy Americans a lower effective tax rate than many low and middle-income taxpayers. Providing less incentive to lock up assets and defer capital gains would put more money back into the economy sooner than under the current rules, thereby reducing economic disparity, according to the Biden tax reform document.

Why is the proposal controversial?

The plan has been sharply criticized for targeting the wealthy and disincentivizing venture capital investment. Critics also argue that administering the new tax regime would be complex and cumbersome.

Are the arguments working?

The message seems to be getting through to Harris, who is courting wealthy donors in her presidential bid and last week won praise from the business community for easing up on plans Biden laid out on capital gains reform.

Could such a plan come to Canada?

The NDP has floated the idea of a one per cent tax on total asset values for those with a net worth over $20 million – a “wealth tax” that would be far “less onerous” than taxing all unrealized capital gains.

Conclusion

Overall, the proposal to tax unrealized capital gains has sparked political debates and practical concerns about its implementation. While the plan aims to address economic disparities, critics argue that it may hinder investment and pose complexities in enforcement.

FAQs

Q: Who would be affected by the proposal to tax unrealized capital gains?

A: Individuals with a net worth of $100 million or more are the primary targets of the proposal, where a minimum tax of 25% on total income inclusive of unrealized capital gains would apply.

Q: How would taxing unrealized capital gains work?

A: The plan involves assessing such gains annually, even if the asset isn’t sold, and treating the taxes as prepayments against future realized capital gains to avoid double taxation.

Q: Could a similar plan come to Canada?

A: While the NDP has suggested a wealth tax on assets over $20 million, taxing all unrealized capital gains in Canada is not currently on the agenda.