4 ms·

I don't get why people say a tax on unrealized gains is not feasible. All it means is that a percent of your investment becomes "realized" every year and you se

by Salgat 2y ago

I don't get why people say a tax on unrealized gains is not feasible. All it means is that a percent of your investment becomes "realized" every year and you sell a portion of your investment to cover it. So if you have a billion dollars in stocks and you have to realize 10% of it in a year, you sell enough stock to cover the $20 million and the other $80 million becomes realized and never taxed again (only future gains on it). In the end you're only taxed $20M in capital gains every year on a billion dollar investment and after 10 years of this your remaining $800M is not taxed any further. EDIT: Since it's not obvious, this would apply to the very rich, not to someone running a family farm. There would be a threshold and exemptions, which is how most taxes work.

doe_eyes 2y ago
> All it means is that a percent of your investment becomes "realized" every year and you sell a portion of your investment to cover it. Because there is a ton of investments that aren't liquid, aren't trivial to value on an ongoing basis, and aren't infinitely divisible. Again, a farm is a perfect example. Land prices are going up. Your family farm was worth n million, and is now theoretically worth twice that. Do you sell a portion of it to developers to pay the tax on the unrealized gains? Oh by the way, the land is probably zoned agricultural, so you actually can't. Or, you buy a famous painting as an investment. Do you cut off a piece each year and auction it off? Yeah, it's relatively easy for stock market holdings. But if stocks get unfavorable tax treatment, all this will accomplish is moving money away from the stock market toward assets that get a better treatment... like investment real estate, with all the problems that entails.
- martijnarts 2y ago
  If you buy a famous painting as an investment, I'd assume you have enough money to cover the taxes without having to auction it. Accurately valuing the painting every year is definitely very difficult. The same argument doesn't necessarily go for a farmer's farmland. The zoning could of course be calculated into the land value. But I'm unsure if farming economics allow for paying the taxes on those unrealized gains
- Salgat 2y ago
  Just to be clear, we're talking about a wealth tax above a certain threshold, think hundreds of millions of dollars to billions and billions. This has no application to anything remotely related to the "family farm". And yes, it is okay to force someone with a half a billion dollars in assets to sell off a small percentage for tax reasons, unless you think they should never ever be taxed for it.
  - doe_eyes 2y ago
    I'm addressing the parent's proposal, which is to "why not just keep selling fractions of the asset to cover taxes". Yes, if you're rich, you might have other ways to cover the liability, but that's not what the parent said. And for what it's worth, these "billionaire" thresholds in political discourse are fairly meaningless. The last time the Biden admin "cracked down on billionaires", they instituted IRS reporting requirements for Paypal and eBay when you receive in excess of $600 a year. There just isn't enough billionaires for policies that truly target only them to make a difference, unless you flat out start taxing / confiscating wealth.
- hnaccount_rng 2y ago
  But that's largely solved right? The banks that issue loans _against_ those assets do put a number on them! Just tax it based on this value. And since they are willing to lend money anyhow, the user can just take out a slightly bigger loan to cover the tax too.
sailingparrot 2y ago
How would you implement that in startup world for example? It's very common for startups to be valued at ~20M$ right out of the gate in seed stage, not because the company is worth $20M, but because at $20M valuation it allows the VCs to invest say $4M and only take 20%, no one want the VCs to take more (not even the VCs themselves) because otherwise it would mean the founders are left with too little equity too soon and probably won't care about their business anymore. Now, as one of the founder, maybe you own ~40% of that business, so now your paper net worth is $8M, and just made $8M of unrealized gains in that year, how are you going to pay that? There is no way you will ever find someone to buy $1M of your share at the price of that round, you probably wouldn't find anyone willing to buy your entire paper $8M for $1M, because again, the company isn't worth $20M yet. This is true until pretty late in a VC backed company, most round aren't priced based on how a realistic buyer would value the company, they are priced based on complex dynamics. Even a large number of unicorn startups founders in the Series C/D stages would have paper wealth of potentially 500M range, but absolutely no way to find 50M. So, you effectively have no way to pay that tax. This system actually already pseudo-exist in Canada in specific conditions: If you stop being a tax resident of the country, all your assets are considered realized the year you leave and you must pay taxes on them. Which is effectively impossible for most startup founders, because again, your stock isn't actually liquid. This means you can't stop being a tax resident of Canada until your companies either dies or you exit somehow. To be clear you can't easily just choose to remain tax resident of Canada while living abroad, Canada gets to decide, to maximize your chance you must prove that you still have ties, so e.g. you have to keep a home, you have to keep your bank accounts opened there, you must visit often enough etc. Canada revenue agency offers one alternative: You leave the country but leave your stock in their keep, on the day you actually realize the gains, they will take what they were owed, which sounds great, except if the company fails, or you realize gains at a lower valuation, they still consider you owe them what was computed the year you left, not the day you exit, so there is a real risk of being in debt for the rest of your life.
- Salgat 2y ago
  You set a minimum threshold to trigger it, and you set certain realistic exemptions for things that would benefit society, including giving a VC time to mature.
jandrewrogers 2y ago
The vast majority of assets held by the ultra-wealthy are non-liquid. Thinking that these assets are "stock" that you can just "sell" is fundamentally misunderstanding the nature of the problem. You can't force realization for tax purposes because in most cases there is no feasible way to realize notional gains. Reality doesn't care if it is inconvenient for the government that assets with unrealized gains have no realizable value. The problem of asset value that is non-realizable is endemic in finance. Additionally, in the minority of cases where it is plausible to force realization, doing so would destroy the notional value of the asset in many cases. The government will have to issue a tax credit, undoing any tax revenue they hoped to gain, but the business is now destroyed so there is no future tax revenue either. Trying to prematurely force realization of asset value is either impossible or destructive in the vast majority of cases.
- Salgat 2y ago
  Oh I'm fully aware of that the ultra wealthy will have to sell off some of their assets. Mind you if this exists, the market will automatically build this assumption into the net worth of an asset. If anything, it will help encourage diversification, overall improving the health of the economy.
- tsimionescu 2y ago
  So what you're saying is that many asset values are purely fictional and don't correspond to a real value that anyone would pay. But, you think this is a good thing and that the government would ruin things if it foced asset values to be closer to what someone would actually pay for them. I don't think your argument is as strong as you think it is. The value of an asset in a market economy is supposed to be what someone would pay for it. If you can't sell your Tesla stock for it's value, then it doesn't actually have that value.

by Salgat 2y ago

doe_eyes 2y ago

> All it means is that a percent of your investment becomes "realized" every year and you sell a portion of your investment to cover it. Because there is a ton of investments that aren't liquid, aren't trivial to value on an ongoing basis, and aren't infinitely divisible. Again, a farm is a perfect example. Land prices are going up. Your family farm was worth n million, and is now theoretically worth twice that. Do you sell a portion of it to developers to pay the tax on the unrealized gains? Oh by the way, the land is probably zoned agricultural, so you actually can't. Or, you buy a famous painting as an investment. Do you cut off a piece each year and auction it off? Yeah, it's relatively easy for stock market holdings. But if stocks get unfavorable tax treatment, all this will accomplish is moving money away from the stock market toward assets that get a better treatment... like investment real estate, with all the problems that entails.

martijnarts 2y ago
If you buy a famous painting as an investment, I'd assume you have enough money to cover the taxes without having to auction it. Accurately valuing the painting every year is definitely very difficult. The same argument doesn't necessarily go for a farmer's farmland. The zoning could of course be calculated into the land value. But I'm unsure if farming economics allow for paying the taxes on those unrealized gains
Salgat 2y ago
Just to be clear, we're talking about a wealth tax above a certain threshold, think hundreds of millions of dollars to billions and billions. This has no application to anything remotely related to the "family farm". And yes, it is okay to force someone with a half a billion dollars in assets to sell off a small percentage for tax reasons, unless you think they should never ever be taxed for it.
- doe_eyes 2y ago
  I'm addressing the parent's proposal, which is to "why not just keep selling fractions of the asset to cover taxes". Yes, if you're rich, you might have other ways to cover the liability, but that's not what the parent said. And for what it's worth, these "billionaire" thresholds in political discourse are fairly meaningless. The last time the Biden admin "cracked down on billionaires", they instituted IRS reporting requirements for Paypal and eBay when you receive in excess of $600 a year. There just isn't enough billionaires for policies that truly target only them to make a difference, unless you flat out start taxing / confiscating wealth.
hnaccount_rng 2y ago
But that's largely solved right? The banks that issue loans _against_ those assets do put a number on them! Just tax it based on this value. And since they are willing to lend money anyhow, the user can just take out a slightly bigger loan to cover the tax too.

sailingparrot 2y ago

How would you implement that in startup world for example? It's very common for startups to be valued at ~20M$ right out of the gate in seed stage, not because the company is worth $20M, but because at $20M valuation it allows the VCs to invest say $4M and only take 20%, no one want the VCs to take more (not even the VCs themselves) because otherwise it would mean the founders are left with too little equity too soon and probably won't care about their business anymore. Now, as one of the founder, maybe you own ~40% of that business, so now your paper net worth is $8M, and just made $8M of unrealized gains in that year, how are you going to pay that? There is no way you will ever find someone to buy $1M of your share at the price of that round, you probably wouldn't find anyone willing to buy your entire paper $8M for $1M, because again, the company isn't worth $20M yet. This is true until pretty late in a VC backed company, most round aren't priced based on how a realistic buyer would value the company, they are priced based on complex dynamics. Even a large number of unicorn startups founders in the Series C/D stages would have paper wealth of potentially 500M range, but absolutely no way to find 50M. So, you effectively have no way to pay that tax. This system actually already pseudo-exist in Canada in specific conditions: If you stop being a tax resident of the country, all your assets are considered realized the year you leave and you must pay taxes on them. Which is effectively impossible for most startup founders, because again, your stock isn't actually liquid. This means you can't stop being a tax resident of Canada until your companies either dies or you exit somehow. To be clear you can't easily just choose to remain tax resident of Canada while living abroad, Canada gets to decide, to maximize your chance you must prove that you still have ties, so e.g. you have to keep a home, you have to keep your bank accounts opened there, you must visit often enough etc. Canada revenue agency offers one alternative: You leave the country but leave your stock in their keep, on the day you actually realize the gains, they will take what they were owed, which sounds great, except if the company fails, or you realize gains at a lower valuation, they still consider you owe them what was computed the year you left, not the day you exit, so there is a real risk of being in debt for the rest of your life.

Salgat 2y ago
You set a minimum threshold to trigger it, and you set certain realistic exemptions for things that would benefit society, including giving a VC time to mature.

jandrewrogers 2y ago

The vast majority of assets held by the ultra-wealthy are non-liquid. Thinking that these assets are "stock" that you can just "sell" is fundamentally misunderstanding the nature of the problem. You can't force realization for tax purposes because in most cases there is no feasible way to realize notional gains. Reality doesn't care if it is inconvenient for the government that assets with unrealized gains have no realizable value. The problem of asset value that is non-realizable is endemic in finance. Additionally, in the minority of cases where it is plausible to force realization, doing so would destroy the notional value of the asset in many cases. The government will have to issue a tax credit, undoing any tax revenue they hoped to gain, but the business is now destroyed so there is no future tax revenue either. Trying to prematurely force realization of asset value is either impossible or destructive in the vast majority of cases.

Salgat 2y ago
Oh I'm fully aware of that the ultra wealthy will have to sell off some of their assets. Mind you if this exists, the market will automatically build this assumption into the net worth of an asset. If anything, it will help encourage diversification, overall improving the health of the economy.
tsimionescu 2y ago
So what you're saying is that many asset values are purely fictional and don't correspond to a real value that anyone would pay. But, you think this is a good thing and that the government would ruin things if it foced asset values to be closer to what someone would actually pay for them. I don't think your argument is as strong as you think it is. The value of an asset in a market economy is supposed to be what someone would pay for it. If you can't sell your Tesla stock for it's value, then it doesn't actually have that value.