Going after unrealised gains is easy to understand and hence good politics. But it is bad economics. However, the US president, Joe Biden, has promised to raise $500bn over ten years for social programmes by charging a 25% tax on the unrealised capital gains of individuals who are worth $100m or more. Unrealized gains are wealth which is not converted to US dollars, then so far in many countries were not taxed. For example, Mr. Jensen Huang, the founder of Nvidia, made more than $100bn in the last few years. But until he sells some of his stocks, all that wealth is off-limits to the taxman.
Calculating someone’s net worth is hard even when they die, let alone every year. It took the Internal Revenue Service 12 years to value Michael Jackson’s wealth. France, Sweden, and a few other European countries who attempted to collect wealth taxes abandoned their efforts after incurring numerous administrative hassles but yielding little actual money.
On the other hand, the unrealized gains are prone to harsh fluctuations. If the gains are taxable, the losses should be calculated as tax relief or tax credit.Â
Mr Biden’s proposal, which assesses the tax over five years, mitigates some of the volatility. However, some taxpayers would still not be eligible for a rebate for their unrealised losses. This may prevent angel investors and other risk takers from funding promising enterprises with exorbitant values that could suddenly fail and are difficult to price.
Image credit: ETF Trends
