4 ms·

Unrealized capital gains are not income. This article wants a wealth tax because they think this is "income" that is going untaxed.

deleted 3y ago
[deleted]
jackmott42 3y ago
Elon bought twitter with unrealized capital gains.
- HPsquared 3y ago
  Surely they became "realized" in the process.
  - jackmott42 3y ago
    Nope, because he used a loan, so he was able to buy twitter and not pay taxes. He will have to pay taxes if and when he pays off the loan, maybe.
    - samsolomon 3y ago
      I have a hard time believing that he didn't realize gains on the Tesla stock he sold to cover part of the purchase. Twitter, the company, took out a loan as part of the financing to help Musk close. That is why Twitter desperately needs to return a profit. Because it now has to service that loan. Those are different things. EDIT: For reference it looked like he originally was going to back the loan with Tesla shares—so he wouldn't have to sell. It looks like he abandoned that idea and sold about $15.5B shares of Tesla to finance the deal. Maybe that's where the confusion is from? https://www.aljazeera.com/economy/2022/10/28/how-elon-musk-financed-his-twitter-takeover https://www.aljazeera.com/economy/2022/10/28/how-elon-musk-f...
  - eli 3y ago
    It's called "Buy, Borrow, Die" -- in that scheme no one ever pays capital gains tax. https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax https://www.propublica.org/article/the-secret-irs-files-trov...
- pclmulqdq 3y ago
  He used a margin loan for part of it (you can think of this as extracting money from unrealized gains, but it's kind of different), liquidated shares for part of it (realizing a gain in the process), and will pay interest on that margin loan (realizing a gain for each payment) for the duration of the loan. If he wants to pay off the loan, he will have to realize a gain. The margin loan is effectively tax deferral, not tax elimination.
eli 3y ago
Only because of how we've chosen to define income.
- baronswindle 3y ago
  The proposal in the article is to tax wealth at an annual rate of 2%. Not realized gains. Not unrealized gains. Wealth. Under such a system — unless I've badly misunderstood something — if a billionaire's assets decreased in value over the course of a year, they would still pay 2% on their assets. I can't think of any sense in which a decrease in the value of one's assets would be defined as income. I have an opinion of the wisdom of a wealth tax, and I could be wrong. Regardless of my opinion, I think it's indisputable that a wealth tax and an income tax are different and that conflating the two makes a debate on the merits much more difficult.
  - eli 3y ago
    Seems silly to debate a hypothetical tax you extrapolated from a single sentence. The "billionaire's tax" Biden proposed earlier this year is closer an income tax that also includes unrealized gains and only if there are tens of millions in unrealized gains in that year. That said: you pay property tax even if the value of your home declines. It's not that crazy.
    - makomk 3y ago
      The whole point of proposals like the one the entire linked article is about is to make it seem like vast sums of money can be raised from seemingly small taxes on a few wealthy people by definining those taxes as an annual percentage of total wealth rather than income. The framing is meant to trick readers into mentally comparing the 2% tax it proposes and the 0-0.5% tax it claims the wealthy are currently paying with the familiar 20-40% or more they have to pay on their own income, when in reality the two are calculated in vastly different ways and the article gives readers no way of putting it in any more meaningful context.
      - eli 3y ago
claudiulodro 3y ago
Why is it unthinkable to make billionaires generate some income to pay taxes? I pay property taxes on the "unrealized capital gains" of my house, and somehow I make it work.
- clarkmoody 3y ago
  Perhaps you shouldn't have to pay unrealized gains on your house?
  - vermilingua 3y ago
    Don’t like your odds of financing that scheme, unless you start taxing some billionaires
  - deleted 3y ago
    [deleted]
  - philjohn 3y ago
    Cool - how are the roads, local police, fire etc. getting paid for then?
- pclmulqdq 3y ago
  You don't pay property tax on unrealized gains in your house. You pay it on the appraised value of your house. If you don't like that appraised value, you can appeal it (and many people do), and it often doesn't rise nearly as much as the actual value of the house.
  - thomasdub 3y ago
    "An appraised value" could work for companies too! Though, in fairness, for many billionaires the gains are pretty explicit i.e. we know the public stock price or the 409a valuation.
  - roflyear 3y ago
    I don't know what you're arguing. You can contest the appraised value but rarely will you win unless it's egregious.
VikingCoder 3y ago
My wealth was $x one year. And $x + $y the following year. If I work my ass off doing manual labor, $y gets taxed more than if I merely own equity that got me the same amount. And people wonder why the middle class is dying.
- jandrewrogers 3y ago
  In the US, the tax code is such that you pay taxes on capital when you've lost capital too, not just on the gains. This doesn't happen with normal wage income hence why it is treated differently. The lower tax rates on capital reflect the reality that you are paying taxes on the losses too. Tax rates ideally should be flat for all sources of income net of risk, loss, and inflation. To achieve this you either allow deductions for these, which are limited or non-existent in the US, or you lower the tax rates to offset the fact that you can't deduct these.
  - deleted 3y ago
    [deleted]
  - Cicero22 3y ago
    I haven't heard that you're taxed when you lose money. My understanding was that If I invest $10,000 in a taxable account, lose $1,000, and withdraw the remaining $9,000, I won't pay taxes on the $9,0000 (ignoring transaction fees).
  - antisthenes 3y ago
    > The lower tax rates on capital reflect the reality that you are paying taxes on the losses too No, you don't. You actually get a tax credit (e.g. you pay LESS taxes), if you incur certain types of capital losses.
    - jandrewrogers 3y ago
      The tax reduction against income for capital losses rounds to zero for all practical purposes. Long-term inflation losses are not deductible at all in the US even though they can often exceed notional returns.
seanhunter 3y ago
It may be surprising, but wall street firms (for example) don't have a concept of "Unrealized capital gains". They mark to market on a daily basis and book the pnl and pay whatever tax. I know that at Goldman (where I worked) this is almost a religion, and I would expect it is the same at JPM and Morgan Stanley. One reason the author is probably suggesting this is that there are a wealth of schemes whereby income can be deferred and tax avoided by use/misuse of unrealized gains.
- chollida1 3y ago
  > It may be surprising, but wall street firms (for example) don't have a concept of "Unrealized capital gains". This is just false in my experience, well atleast for how you've stated it. It may be true for some particular company but I don't know a single fund that doesn't track unrealized cap gains. Specifically around this time we start to look at how to defer realizing these gains till next year to push off the tax burden until the new year. I mean, alot of large in the money option trades get written at this time of year just to lock in a price on a position that expires next year. We wouldn't do this if we didn't track unrealized cap gains. Heck, the single largest impediment to growing wealth is taxes, we fixate an awful lot on the type of tax we pay and when we pay it. Maybe you can expand on your response as it seems completely false to me that the concept of Unrealized cap gains doesn't exist.
  - lotteryland 3y ago
    This is indeed false for the kinds of people and companies they own that matter for this discussion.
  - seanhunter 3y ago
    To be clear I wasn't talking at all about buy-side. I was talking about big broker-dealers. They are all MTM as far as I know. My point was that finance in and on itself doesn't depend on a concept of unrealized gains. It's perfectly possible to devise a system of taxation that just says you have to mark to market and then pay tax on that. There would for sure be complications around how you get valuations for illiquid investments etc.
jmull 3y ago
The entire point of the article is about taxing the wealth of extremely rich people rather than income because the wealth is structured to not generate taxable income. I think there are two considerations here: (1) fairness, (2) good economic policy. It's certainly not fair to have such a large proportion of power concentrated in such a minuscule number of people. It's hard to see how it's a good economic policy either. We want there to be capital available to be invested in further economic activities (I think we do, anyway; there are people who would debate that). But we don't want -- and certainly don't need -- so much of it in so few hands. A wealth tax is a way to drain some of that away.

deleted 3y ago

[deleted]

jackmott42 3y ago

Elon bought twitter with unrealized capital gains.

HPsquared 3y ago
Surely they became "realized" in the process.
- jackmott42 3y ago
  Nope, because he used a loan, so he was able to buy twitter and not pay taxes. He will have to pay taxes if and when he pays off the loan, maybe.
  - samsolomon 3y ago
    I have a hard time believing that he didn't realize gains on the Tesla stock he sold to cover part of the purchase. Twitter, the company, took out a loan as part of the financing to help Musk close. That is why Twitter desperately needs to return a profit. Because it now has to service that loan. Those are different things. EDIT: For reference it looked like he originally was going to back the loan with Tesla shares—so he wouldn't have to sell. It looks like he abandoned that idea and sold about $15.5B shares of Tesla to finance the deal. Maybe that's where the confusion is from? https://www.aljazeera.com/economy/2022/10/28/how-elon-musk-financed-his-twitter-takeover https://www.aljazeera.com/economy/2022/10/28/how-elon-musk-f...
- eli 3y ago
  It's called "Buy, Borrow, Die" -- in that scheme no one ever pays capital gains tax. https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax https://www.propublica.org/article/the-secret-irs-files-trov...
pclmulqdq 3y ago
He used a margin loan for part of it (you can think of this as extracting money from unrealized gains, but it's kind of different), liquidated shares for part of it (realizing a gain in the process), and will pay interest on that margin loan (realizing a gain for each payment) for the duration of the loan. If he wants to pay off the loan, he will have to realize a gain. The margin loan is effectively tax deferral, not tax elimination.

eli 3y ago

Only because of how we've chosen to define income.

baronswindle 3y ago
The proposal in the article is to tax wealth at an annual rate of 2%. Not realized gains. Not unrealized gains. Wealth. Under such a system — unless I've badly misunderstood something — if a billionaire's assets decreased in value over the course of a year, they would still pay 2% on their assets. I can't think of any sense in which a decrease in the value of one's assets would be defined as income. I have an opinion of the wisdom of a wealth tax, and I could be wrong. Regardless of my opinion, I think it's indisputable that a wealth tax and an income tax are different and that conflating the two makes a debate on the merits much more difficult.
- eli 3y ago
  Seems silly to debate a hypothetical tax you extrapolated from a single sentence. The "billionaire's tax" Biden proposed earlier this year is closer an income tax that also includes unrealized gains and only if there are tens of millions in unrealized gains in that year. That said: you pay property tax even if the value of your home declines. It's not that crazy.
  - makomk 3y ago
    The whole point of proposals like the one the entire linked article is about is to make it seem like vast sums of money can be raised from seemingly small taxes on a few wealthy people by definining those taxes as an annual percentage of total wealth rather than income. The framing is meant to trick readers into mentally comparing the 2% tax it proposes and the 0-0.5% tax it claims the wealthy are currently paying with the familiar 20-40% or more they have to pay on their own income, when in reality the two are calculated in vastly different ways and the article gives readers no way of putting it in any more meaningful context.
    - eli 3y ago

claudiulodro 3y ago

Why is it unthinkable to make billionaires generate some income to pay taxes? I pay property taxes on the "unrealized capital gains" of my house, and somehow I make it work.

clarkmoody 3y ago
Perhaps you shouldn't have to pay unrealized gains on your house?
- vermilingua 3y ago
  Don’t like your odds of financing that scheme, unless you start taxing some billionaires
- deleted 3y ago
  [deleted]
- philjohn 3y ago
  Cool - how are the roads, local police, fire etc. getting paid for then?
pclmulqdq 3y ago
You don't pay property tax on unrealized gains in your house. You pay it on the appraised value of your house. If you don't like that appraised value, you can appeal it (and many people do), and it often doesn't rise nearly as much as the actual value of the house.
- thomasdub 3y ago
  "An appraised value" could work for companies too! Though, in fairness, for many billionaires the gains are pretty explicit i.e. we know the public stock price or the 409a valuation.
- roflyear 3y ago
  I don't know what you're arguing. You can contest the appraised value but rarely will you win unless it's egregious.

VikingCoder 3y ago

My wealth was $x one year. And $x + $y the following year. If I work my ass off doing manual labor, $y gets taxed more than if I merely own equity that got me the same amount. And people wonder why the middle class is dying.

jandrewrogers 3y ago
In the US, the tax code is such that you pay taxes on capital when you've lost capital too, not just on the gains. This doesn't happen with normal wage income hence why it is treated differently. The lower tax rates on capital reflect the reality that you are paying taxes on the losses too. Tax rates ideally should be flat for all sources of income net of risk, loss, and inflation. To achieve this you either allow deductions for these, which are limited or non-existent in the US, or you lower the tax rates to offset the fact that you can't deduct these.
- deleted 3y ago
  [deleted]
- Cicero22 3y ago
  I haven't heard that you're taxed when you lose money. My understanding was that If I invest $10,000 in a taxable account, lose $1,000, and withdraw the remaining $9,000, I won't pay taxes on the $9,0000 (ignoring transaction fees).
- antisthenes 3y ago
  > The lower tax rates on capital reflect the reality that you are paying taxes on the losses too No, you don't. You actually get a tax credit (e.g. you pay LESS taxes), if you incur certain types of capital losses.
  - jandrewrogers 3y ago
    The tax reduction against income for capital losses rounds to zero for all practical purposes. Long-term inflation losses are not deductible at all in the US even though they can often exceed notional returns.

seanhunter 3y ago

It may be surprising, but wall street firms (for example) don't have a concept of "Unrealized capital gains". They mark to market on a daily basis and book the pnl and pay whatever tax. I know that at Goldman (where I worked) this is almost a religion, and I would expect it is the same at JPM and Morgan Stanley. One reason the author is probably suggesting this is that there are a wealth of schemes whereby income can be deferred and tax avoided by use/misuse of unrealized gains.

chollida1 3y ago
> It may be surprising, but wall street firms (for example) don't have a concept of "Unrealized capital gains". This is just false in my experience, well atleast for how you've stated it. It may be true for some particular company but I don't know a single fund that doesn't track unrealized cap gains. Specifically around this time we start to look at how to defer realizing these gains till next year to push off the tax burden until the new year. I mean, alot of large in the money option trades get written at this time of year just to lock in a price on a position that expires next year. We wouldn't do this if we didn't track unrealized cap gains. Heck, the single largest impediment to growing wealth is taxes, we fixate an awful lot on the type of tax we pay and when we pay it. Maybe you can expand on your response as it seems completely false to me that the concept of Unrealized cap gains doesn't exist.
- lotteryland 3y ago
  This is indeed false for the kinds of people and companies they own that matter for this discussion.
- seanhunter 3y ago
  To be clear I wasn't talking at all about buy-side. I was talking about big broker-dealers. They are all MTM as far as I know. My point was that finance in and on itself doesn't depend on a concept of unrealized gains. It's perfectly possible to devise a system of taxation that just says you have to mark to market and then pay tax on that. There would for sure be complications around how you get valuations for illiquid investments etc.

jmull 3y ago

The entire point of the article is about taxing the wealth of extremely rich people rather than income because the wealth is structured to not generate taxable income. I think there are two considerations here: (1) fairness, (2) good economic policy. It's certainly not fair to have such a large proportion of power concentrated in such a minuscule number of people. It's hard to see how it's a good economic policy either. We want there to be capital available to be invested in further economic activities (I think we do, anyway; there are people who would debate that). But we don't want -- and certainly don't need -- so much of it in so few hands. A wealth tax is a way to drain some of that away.