Contents
The New Proposed Wealth Tax on Unrealized Capital Gains Explained
Wealth Tax Proposal on Unrealized Capital Gains Explained
There is a new US tax proposal circulating that involves the idea of taxing the wealthy on unrealized capital gains — which is a wealth tax — and presumably unconstitutional (or should be). The problem is, this type of tax proposal may be a glimpse into other new US Government tax rules, such as taxing high-income earners’ capital gains at the top tax rate instead of 20% — as well as reducing the tax benefits that high-income earners get by deferring income through 401K plans. The new tax proposal serves to tax individuals on their wealth and not actual income generated — since the tax is based on increases in asset value and not due to a taxable event. Let’s review the basics of The New Proposed Wealth Tax on Unrealized Capital Gains —
Realized Capital Gains
Here is a very typical example of capital gains on a realized taxable event: Dean owns stock that he purchased for $50,000 many years ago. Tomorrow, Dean sells the stock for $70,000. As a result, Dean pays either 15% or 20% tax on the realized gain of $20,000 ($70,000 – $50,000 = $20,000).
Unrealized Capital Gains
Conversely, Dean is a very wealthy individual who owns stock worth $10,000,000. This year, the value of the stock is now $12,000,000. Dean has not sold any of the stock, so there is no realized gain. Nevertheless, Dean would be taxed on the unrealized gain of $2,000,000 (the difference between the adjusted basis of $10,000,000 and the current Fair Market Value of $12,000,000). The reason that this is so unfair, is because the individual is NOT being taxed because he generated any income; rather, Dean is being taxed because he owns assets that increased in value (they may also decrease in the future) and not because he sold or otherwise exchanged the assets.
This is a very slippery slope, and causing many Taxpayers to consider expatriation — as there are many other potential tax rules in play that will impact not only the very wealthy — such as the pension rules and tax rate rules on certain taxes generated from realized capital gains.
Interested in Expatriation from the U.S.?
Our firm specializes exclusively in international tax.
Contact our firm for assistance with getting compliant.
