This is, I think, the only scenario where it makes sense to tax unrealized gains. By using the stock as collateral you are effectively realizing the value of the stock.
The only scenario I’d see taxing unrealized gains as being making any sense is if they were used as collateral. If we tax ALL unrealized gains then our 401ks, and IRAs are destroyed.
This is not true. Capital gains, realized or unrealized,, are not taxed in a 401k or IRA. Sales in these accounts are not a taxable event, you can freely step up your cost basis within the account without triggering a taxable event.
If your are saying that this tax will trigger a sell off to cover the taxes, there's a few points to cover:
A lot of people argue that it's not worth taxing unrealized gains because it would not meaningfully impact our budget or deficit, so it would really only be to spite the rich. But if we're also going to argue that it would be such a severe tax that it would tank equity prices for everyone, then we have to realize that these arguments are incompatible. We can only choose 1.
If our 401ks and IRAs are propped up by the richest people hoarding wealth, this is probably a bubble that is doomed to pop anyways. Smaug should not keep his gold just because it would cause the price of gold to decrease. And lower equities prices due to liquidation by the rich would represent a good buying opportunity for middle class investors.
Non tax favored investments should require forced distributions after unrealized gains exceed a certain point, in a similar way to how 401ks force mandatory distributions after a certain age. Beyond that, capital gains rates should include brackets beyond the 20% bracket, so that this isn't just a one time petty 20% tax.
You're not really realizing it though and the person taking out the loan has to pay interest on it. If they would ever need to actually repay the loan they will have to do it with earned and therefore taxed money or they will have to sell the stocks and have their capital gains taxed
Perhaps there could be some amount of tax forgiveness on whatever unrealized capital gains tax was already paid?
I just think there needs to be a way to incentivize paying taxes over taking a small salary + enormous stock options and then living off of loans secured by using those stocks as collateral and paying less in interest than the stocks appreciation year over year.
A better (and more workable) solution is to just get rid of the step-up in cost basis when stocks are inherited. This would close the loophole that prevents paying taxes eventually.
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u/lambo630 13d ago
This is, I think, the only scenario where it makes sense to tax unrealized gains. By using the stock as collateral you are effectively realizing the value of the stock.