5 ms·

What are unrecognized capital gains?

by nickthemagicman 6y ago

epa 6y ago
Stock that has gone up in value for which you have not yet sold.
ls612 6y ago
He means unrealized capital gains, those are gains on stock you have bought and are holding, but have not sold yet.
- zaroth 6y ago
  Apologies for the typo, and thank you for the correction!
jcampbell1 6y ago
Let’s say you are a painter, and you paint 20 pictures and sell 10 for 100,000 each. You pay taxes on the 1m you receive. The other 10 painting are sitting in a storage unit. Then at some point in the future someone, one of you previous customers sells their painting in a private sale for 10M. They pay capital gains on $9.9m. Now you as the painter hypothetically have $100M worth of in paintings in your storage unit. Traditionally this net worth is considered unrealized capital gains and is untaxed. It will be taxed when sold. Replace paintings with ownership of a company (equity) and you should get the idea.
- pjettter 6y ago
  This is how it works (or at least used to work) in The Netherlands. If you receive Stock options, you pay taxes over the gains, i.e. the money you would have made if you exercised on that date. Even if you have not exercised. So the options were free, but suddenly you have to find a lot of money to keep them. Or you exercise a part of them.
  - apta 6y ago
    Sounds like a terrible system.
- beerandt 6y ago
  Put another way, it's taxing money (value) that you haven't actually made yet.
  - ISL 6y ago
    More-dangerously, it is taxing theoretical money that you haven't yet made. There is no guarantee that the current market-clearing price for a given object is equivalent to that at which a larger inventory can be sold. Taxing capital gains at the time of sale makes sense -- there is actual revenue available for taxation. Taxing unrealized gains can be a path to really-negative outcomes. This is particularly so if the government doesn't give matching credits for unrealized capital losses.
    - jcampbell1 6y ago
      There are some loopholes that should be closed however. You can go to a bank and borrow against your shares, using them as an asset without realizing capital gains. In my mind, if you use the shares (gains) as collateral for your benefit, you should have to recognize the capital gains as mark-to-market immediately payable.
      - ISL 6y ago
        Presumably the bank won't accept them as collateral for more than can be realized at the time of sale? I'm no expert, but I would guess that, if shares are foreclosed upon, the bank's basis is zero (and their taxation short-term)? (Edit: the downside here is that the government doesn't see any revenue from this approach, which it might otherwise. The shareholder must pay interest, though, which might not be to their advantage.)
      - beerandt 6y ago
        A loan is not (usually) taxable income. Taxable income is used to pay back the loan. This keeps people's capital invested longer term, which is part of the purpose of capital gains tax incentives. In other words, it's not a loophole. It's working as intended.
  - 6y ago
- RobRivera 6y ago
  Great example, and its a dangerous policy bc it makes the incentive to sell your assets to cover the tax bill higher, regardless of your personal plans with them. (Maybe they are future wedding gifts for your children?)
aantix 6y ago
Imagine the house you live in is worth $250,000. And imagine paying "asset" taxes on that $250,000 home even though you still live there.
- kec 6y ago
  isn't that literally what property taxes are?
- RobRivera 6y ago
  Thats...not unrealized cap gains tax, at all. That's property taxes and is a real thing to home owners. My tax bill grows every year bc my home gets assessed at higher values
- nickthemagicman 6y ago
  But but does the gov't pay you if the house price goes down?
RobRivera 6y ago
Forget metaphors, here's a real example. You have stock in amzn, say you buy at 3200 a share. A year from now it's 4k a share. 800$ capital gains...you get taxed on that. It is a terrible tax law bc it is unrealized. What happens when you get taxes on that 800$, then the share drops down to 3300, you sell at 3300, making a REAL profit of 100$? Do you feel fairly taxes at 800$ profit despit having only 100$ profit?

What are unrecognized capital gains?

epa 6y ago

Stock that has gone up in value for which you have not yet sold.

ls612 6y ago

He means unrealized capital gains, those are gains on stock you have bought and are holding, but have not sold yet.

zaroth 6y ago
Apologies for the typo, and thank you for the correction!

jcampbell1 6y ago

Let’s say you are a painter, and you paint 20 pictures and sell 10 for 100,000 each. You pay taxes on the 1m you receive. The other 10 painting are sitting in a storage unit. Then at some point in the future someone, one of you previous customers sells their painting in a private sale for 10M. They pay capital gains on $9.9m. Now you as the painter hypothetically have $100M worth of in paintings in your storage unit. Traditionally this net worth is considered unrealized capital gains and is untaxed. It will be taxed when sold. Replace paintings with ownership of a company (equity) and you should get the idea.

pjettter 6y ago
This is how it works (or at least used to work) in The Netherlands. If you receive Stock options, you pay taxes over the gains, i.e. the money you would have made if you exercised on that date. Even if you have not exercised. So the options were free, but suddenly you have to find a lot of money to keep them. Or you exercise a part of them.
- apta 6y ago
  Sounds like a terrible system.
beerandt 6y ago
Put another way, it's taxing money (value) that you haven't actually made yet.
- ISL 6y ago
  More-dangerously, it is taxing theoretical money that you haven't yet made. There is no guarantee that the current market-clearing price for a given object is equivalent to that at which a larger inventory can be sold. Taxing capital gains at the time of sale makes sense -- there is actual revenue available for taxation. Taxing unrealized gains can be a path to really-negative outcomes. This is particularly so if the government doesn't give matching credits for unrealized capital losses.
  - jcampbell1 6y ago
    There are some loopholes that should be closed however. You can go to a bank and borrow against your shares, using them as an asset without realizing capital gains. In my mind, if you use the shares (gains) as collateral for your benefit, you should have to recognize the capital gains as mark-to-market immediately payable.
    - ISL 6y ago
      Presumably the bank won't accept them as collateral for more than can be realized at the time of sale? I'm no expert, but I would guess that, if shares are foreclosed upon, the bank's basis is zero (and their taxation short-term)? (Edit: the downside here is that the government doesn't see any revenue from this approach, which it might otherwise. The shareholder must pay interest, though, which might not be to their advantage.)
    - beerandt 6y ago
      A loan is not (usually) taxable income. Taxable income is used to pay back the loan. This keeps people's capital invested longer term, which is part of the purpose of capital gains tax incentives. In other words, it's not a loophole. It's working as intended.
- 6y ago
RobRivera 6y ago
Great example, and its a dangerous policy bc it makes the incentive to sell your assets to cover the tax bill higher, regardless of your personal plans with them. (Maybe they are future wedding gifts for your children?)

aantix 6y ago

Imagine the house you live in is worth $250,000. And imagine paying "asset" taxes on that $250,000 home even though you still live there.

kec 6y ago
isn't that literally what property taxes are?
RobRivera 6y ago
Thats...not unrealized cap gains tax, at all. That's property taxes and is a real thing to home owners. My tax bill grows every year bc my home gets assessed at higher values
nickthemagicman 6y ago
But but does the gov't pay you if the house price goes down?

RobRivera 6y ago

Forget metaphors, here's a real example. You have stock in amzn, say you buy at 3200 a share. A year from now it's 4k a share. 800$ capital gains...you get taxed on that. It is a terrible tax law bc it is unrealized. What happens when you get taxes on that 800$, then the share drops down to 3300, you sell at 3300, making a REAL profit of 100$? Do you feel fairly taxes at 800$ profit despit having only 100$ profit?