Tax on unrealized gains! Biden’s latest budget document proposes 25% minimum income tax on wealthy taxpayers

The US elections are approaching, and the discussion of taxing unrealized gains on investments is gaining traction. Yes, you read that correctly: Americans may face a tax on notional profits or a capital tax on unrealized gains. But, will it apply to all taxpayers, let us see.

Gains made in stocks, bonds, gold, home property, or any other financial asset are subject to tax in most countries. Such gains are taxed only after selling off the asset. However, a proposal floated in President Joe Biden’s latest budget document suggests a tax on unrealized gains from assets. It means, American taxpayers will have to pay annual tax on the increased value of assets such as stocks and homes, even if they are not sold.

Taxing unrealized gains will work like this – Say, you invest $1 million in stocks whose value becomes $1.5 million over 12 months. Even if the stock is not sold, tax will have to be paid on the gains (unrealized) of $500,000.

However, the proposal of a tax on unrealized gains from assets will not impact most Americans as the rules will apply only to taxpayers with net worth greater than $100 million.

Biden’s Proposal

President Joe Biden’s latest budget document says – “Proposal is to impose a minimum tax of 25 percent on total income, generally inclusive of unrealized capital gains, for all taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) greater than $100 million.” The proposal would be effective for taxable years beginning after December 31, 2024.

Accounting of tax on unrealized gains

The proposal allows taxpayers to pay their first year’s minimum tax liability in nine equal annual installments, followed by five equal annual installments for subsequent years.

Taxpayers with wealth greater than the threshold would be required to report to the Internal Revenue Service (IRS) on an annual basis, separately by asset class, the total basis and total estimated value (as of December 31 of the taxable year) of their assets in each specified asset class, and the total amount of their liabilities. Tradable assets, for example, publicly traded stock, would be valued using end-of-year market prices.

Reality Check

What it all means is the Biden administration’s budget proposes a tax on unrealized gains on assets only for taxpayers with a net worth of at least $100 million, which could mean only about 0.01 percent of American taxpayers. The proposed 25% minimum income tax is proposed to be imposed on extremely wealthy taxpayers.