Taxing Unrealized Gains Is Crazy

^{Image Source}

The Democrats have put forward a proposal to tax the unrealized gains of billionaires. While only slated to apply to billionaires, it is likely that this will eventually lead to everyone's unrealized capital gains being taxed as happened with income tax, which turned into a permanent tax despite promises. Let's discuss what sort of mayhem could result from taxing unrealized gains.

Here's the nightmarish story of a Cisco engineer who got Cisco stock options as part of an incentive package:

https://www.tampabay.com/archive/2001/04/15/stock-options-and-tax-terrors/

What happened was that he turned out owing taxes on unrealized $6.5 million worth of stock options whose worth evaporated. After liquidating everything to his name, the engineer ended up owing $700,000 to the IRS, which financially crippled him for life.

This could happen to millions of people who own extremely volatile or illiquid property. Now, options are hot air by nature and are best avoided entirely, but cryptocurrencies or real estate that is hard to liquidate could prove a deadly trap for many a tax payer. This is why you don't tax anybody's unrealized gains. I don't believe in the "billionaires only" limitations pushed by the Democrats behind this proposal. Eventually, this will be expanded to apply to any and all capital gains.

If the tax bill passes, however, there is no choice but to deal with it. In my opinion, it is best to always stay up to date on how much one owes, assume one realized one's gains and set aside enough cash to cover at least any taxes due. If one's holdings dump come tax season, one can realize losses if that happens and reduce one's tax burden and keep some of the cash.

Because the US is a large country and US investors hold a significant portion of all crypto assets and because the exchange volumes of many of the assets in the space are quite small, it will not be only Americans who will be adversely affected by this idiotic tax bill if it passes. The market will be at risk of dumping thanks to American investors being forced to sell. Also, the US often sets the tone for the rest of the world when it comes to financial regulation and taxation.

Let's hope the Republicans and those Democrats with a modicum of sense will be able to reject this plan.

Posted Using LeoFinance ^Beta