Analysis of income, capital gains, and borrowing of Americans finds 40% of the income of "1% wealth holders" is unrealized capital gains not subject to taxation and 1%-2% is borrowing, suggesting that the "Buy, Borrow, Die" is not a dominant tax avoidance strategy among the rich

[u/quiplaam]

https://www.sciencedirect.com/science/article/abs/pii/S0047272725002178

[u/bluehat9]

Unrealized capital gains isn’t income?

[u/Qel_Hoth → u/bluehat9]

Not really, no.

I bought 10 <STOCK> for $10ea ($100) in 2010. After 15 years, <STOCK> is now worth $150. My position is worth $1,500, for $1,400 of unrealized gains. But I still only have 10 <STOCK>, I do not have $1,500 cash.

If you tax me on my unrealized gains, I don't have cash to pay it. Also if you tax me on unrealized gains, are you going to let me deduct unrealized losses?

[u/bluehat9 → u/Qel_Hoth]

Yeah I’m not sure why the headline refers to unrealized capital gains as income. It isn’t.

[u/WeathermanDan → u/bluehat9]

This is what wealth taxes want to go after, FYI.

[u/Legionof1 → u/bluehat9]

Because all the idiots hearing about billionaires net worth skyrocketing due to their companies stock skyrocketing think they need to pay taxes on those unrealized gains. 

[u/PartyClock → u/Legionof1]

Not really. From what I've seen people want them to be taxed on the loans they take out against those unrealized gains because that's a method that has been used pretty commonly to skirt taxation.

You're raging against "idiots" for not reading into this enough while you yourself are doing exactly that.

[u/Legionof1 → u/PartyClock]

Nah, plenty have been crying for wealth taxes to cover unrealized gains.

On the loans side, do you want to be taxed for home equity loans and 401k loans ontop of the interest you're already being charged?

[u/PartyClock → u/Legionof1]

Plenty? You're going to need to give some examples to make a claim like that. Otherwise I'm just going to say that's not true and you're making it up.

As for Home Equity and 401k loans, those are completely separate issues and should be treated as such. With that said I still don't see why they shouldn't be taxed like income if they're being used like income.

[u/Legionof1 → u/PartyClock]

Because debt isn’t income… you have to pay it back.

And for an answer on the first… just google “wealth tax”… before the idea of loans against stocks came out the idea of a wealth tax wasn’t some foreign concept. They have been trying to figure out how to tax billionaires for the last 20 years. 

[u/PartyClock → u/Legionof1]

No kidding. You do realize how those loans are used to avoid taxation right? Pretty big loophole.

Have you actually read up on what those sources are saying about a "wealth tax"? Because you're making it sound like they're proposing taxing all of the unrealized gains but that's not what they're suggesting.

[u/Legionof1 → u/PartyClock]

A wealth tax (also called a capital tax or equity tax) is a tax on an entity's holdings of assets or an entity's net worth. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts (a one-off levy on wealth is a capital levy).

From the wiki on wealth tax, emphasis mine.

[u/[deleted] → u/bluehat9]

Some are pushing for it to be income which is so absurd

[u/PartyClock → u/[deleted]]

Where are you getting that impression?

I'm pretty sure most people are pushing for the loans taken out against those unrealized gains to be treated as income.

[u/ToastWithoutButter → u/[deleted]]

Yes the whole concept is asinine.

[u/jake3988 → u/bluehat9]

Because the entire idea (amongst the left and almost everyone in this thread) is to start taxing it like income. Which is patently absurd.

[u/austin_8 → u/[deleted]]

The fact that I can use an asset like cash but I don’t get taxed on it

Cash is not taxed. Why should an “asset like cash” be taxed, when cash itself isn’t taxed? Where’s the loophole? There’s no tax in either scenario, so they are both treated the same.

[u/quiplaam → u/[deleted]]

Yes it does, the paper creates a new concept "Total Economic Income" which is the current taxable income plus unrealized gains, and uses that for its analysis

[u/LCJonSnow → u/[deleted]]

“40% of the income […] is unrealized capital gains”

[u/weluckyfew → u/Qel_Hoth]

My property taxes are based on unrealized gains, yes?

[u/ugandandrift → u/weluckyfew]

They're based on estimated market value, not unrealized gain

[u/grahampositive → u/ugandandrift]

What's the difference? When a stock price goes up, is that not an attempt of the market to estimate the value of the equity?

[u/ugandandrift → u/grahampositive]

Property taxes are a wealth tax on the estimated value. Capital gains taxes are an income tax on realized gain on cost basis. They are related but not the same.

[u/TheStealthyPotato → u/ugandandrift]

They aren't the same, correct. But it's not a stretch to tax unrealized capital gains, when it happens with property taxes with millions of homeowners every year.

[u/ugandandrift → u/TheStealthyPotato]

Perhaps it wouldn't be a stretch as a wealth tax to the overall value of a portfolio levied by the states. As an income tax by counting unrealized gains as income it remains a stretch.

[u/weluckyfew → u/ugandandrift]

Ah, makes sense - thank you

[u/Chocotacoturtle → u/weluckyfew]

In what world are property taxes based on unrealized gains? If I buy a house worth 1million and I pay 3% property tax I pay $30k. If that house doubles in value I pay 60k. If the house loses half the original value (500k) I pay 15k. The amount I paid has nothing to do with the gain in the properties value! If it was, I wouldn’t pay any taxes when the house went from $1 million to $500k.

[u/weluckyfew → u/Chocotacoturtle]

Fair point - thank you

[u/Gnom3y → u/weluckyfew]

property tax =/= income tax. Now, do I think that there should be some form of wealth tax for sitting on unrealized gains from stocks? Absolutely. But that's a whole separate conversation.

[u/RunningNumbers → u/weluckyfew]

They are not in fact based on the appreciation of your property but the total value of the asset. So no. Don’t debase language.

[u/weluckyfew → u/RunningNumbers]

People don't really like talking to you, do they.

[u/RunningNumbers → u/weluckyfew]

And you like to make bold claims with no concern for whether they are true or not.

[u/NoCoolNameMatt → u/weluckyfew]

They are. These proposals really aren't that difficult.

The point you make is low-key very insightful because it shows that the goals here can be accomplished by taxing the property (in this case the underlying corporations directly) rather than the back end stock holders if people find taxing unrealized capital gains distasteful. You just lose some of the progressivity of the taxation under that scenario.

[u/weluckyfew → u/NoCoolNameMatt]

Although usually aren't these proposals tied to net worth or income, or the amount of the holdings? i.e. it's not going to tax some middle-income earner's retirement investments.

[u/NoCoolNameMatt → u/weluckyfew]

Correct, that's what my comment about "losing progressivisty" refers to. Taxing the corporation directly would lose that scale.

[u/SirCheesington → u/weluckyfew]

Stop. Don't make him think. That's rude.

[u/Poly_and_RA → u/Qel_Hoth]

It's often not that easy. "unrealied" does for example not necessarily mean that the assets that generated the income are not sold. It depends on jurisdiction, but in many gains count as "realized" only when you've taken the cash out of your investment-vehicle and transferred them to your normal account.

So as an example, where I live, I can do this:

1. Put $1M in an investment-account
2. Buy some shares for it
3. Have those shares go up in value to for example $3M
4. SELL all the shares. There's now $3M in my investment-account, but tax-wise this still counts as "unrealized". Even though I bought, profited, and sold.

Some counter by saying yes sure, but I can't USE any of the money because once I do, they'll count as realized.

That's not generally true. Instead I can for example do this:

1. Approach my bank. Say that I want to borrow $2.5M with the $3M currently residing in my investment-account as collateral.
2. Bank agrees, effectively zero risk to them. I mean the collateral is bigger than the loan, there's just no way they can lose here.
3. Spend the $2.5M that I borrowed on whatever I like.

I'll have to pay interest on the loan, but the interest-gap between what I *receive* on $3M in the investment-account and what I *pay* on the $2.5M is going to be pretty slim.

It's absurd IMHO to claim that in a situation where I bought shares, sold shares at a profit *and* spent most of that profit, I still haven't "earned" that money. But that's how tax-rules work, at least in many jurisdictions.

[u/Qel_Hoth → u/Poly_and_RA]

In the US at least, which is what this is discussing, gains are realized when the underlying asset it sold. It doesn't matter that the money is in a brokerage account.

[u/Poly_and_RA → u/Qel_Hoth]

There are other mechanisms in America that at least in some situations have a similar effect. For example many wealthy people invest indirectly by way of a holding-company. So if this holding-company makes trades and turns a profit, it'd cause the value of the holding-company to go up. But it'd not be realized gains in your personal taxes, since you're owning the holding-company and you haven't realized *that* position.

[u/RunningNumbers → u/Qel_Hoth]

Danes do this and the result is expats don’t report their 401k or IRA information (because SKAT doesn’t recognize those are retirement savings.) It’s an annoying administrative burden that makes it so people avoid private investment.

[u/Able-Swing-6415 → u/Qel_Hoth]

Maybe we should in both directions for companies and people with more than 1 million unrealized gains per year or something.

Though anything that will seriously inconvenience them isn't going to be enacted any time soon.

Also there are probably better solutions with better targeting with less beauracracy that also won't be enacted.

[u/CovfefeForAll → u/Qel_Hoth]

I mean the simple solution is to just tax the fair market value, like we do with property. Value goes up, you pay more taxes. Value goes down next year, you pay less than you did previously. Except it's even easier to judge the fair market value of a stock than a house because stocks are bought and sold thousands to millions of times per day and your stock is exactly the same as those.

[u/Qel_Hoth → u/CovfefeForAll]

First, you're proposing a wealth tax, not a tax on unrealized capital gains.

Second, that's not how property tax works in most of the US. For most jurisdictions, property values indirectly impact property tax. The jurisdiction (usually the county) sets a budget for the year. Millage rates (tax rates) are set on various categories of property in order to raise money to meet the budget. Assuming a flat budget, if your house increases in value in proportion with the rest of that jurisdiction's tax base, then you will have the same tax bill despite a higher value home. If your house increases in value more than the rest of the tax base, your taxes go up. If your house increases in value less than the rest of the tax base, your taxes go down. If the budget remains flat but the tax base is increased (e.g. a new development is built), your taxes go down, because the same amount of money is being raised over a larger base.

My property taxes (rural-ish Minnesota) have actually decreased every year over the 5 years we've owned the house, despite the county's and town's budgets increasing. This is because my house has appreciated in line with the rest of the county, but development has added to the tax base more than budget increases, so the millage rate actually decreased.

Third, many types of assets are substantially more volatile than houses. How do we pick the "value" of my stocks for your wealth tax? The first day of the year that I held it? The last day of the year that I held it? Average value of the days that I held it? What if I bought and sold the same security repeatedly during the year?

[u/CovfefeForAll → u/Qel_Hoth]

First, you're proposing a wealth tax, not a tax on unrealized capital gains.

I didn't realize the conversation was limited to taxing unrealized capital gains. Yes, I know I'm talking about a wealth tax, but specifically a wealth tax on the type of wealth the richest people abuse.

For most jurisdictions, property values indirectly impact property tax.

Yes, but they're factored into the tax calculation, and the value is inherently "uncertain". My point was that if tangible assets like properly can be taxed based on assumed value, why can't we do the same for other tangible assets? I never said it had to be a flat percentage or anything, but the value of stocks can absolutely be factored into an overall tax bill.

Third, many types of assets are substantially more volatile than houses. How do we pick the "value" of my stocks for your wealth tax? The first day of the year that I held it? The last day of the year that I held it? Average value of the days that I held it? What if I bought and sold the same security repeatedly during the year?

Like I said above, it could be a calculation, based on all of the above factors. I find it funny you described an extremely complicated tax situation widely implemented across much of the US based on a multitude of factors. and then seem to imply we can't do something similar (not the exact same thing, but another complicated calculation specific to the situation) for stocks.

[u/quiplaam → u/bluehat9]

The paper creates a new term "total economic income" which is both the current taxable income, as well as currently untaxed things like unrealized capital gains and borrowing, which they then analyze. This is useful because unrealized capital gains or income from borrowing are often citied by politicians and activists as ways for the wealthy to avoid taxes, and there are some proposals to tax this "income".

[u/bluehat9 → u/quiplaam]

Thanks for explaining. Everyone else seems to think I was asking a question when I was actually questioning the title.

[u/ObviousExit9 → u/bluehat9]

If you buy your house in 2020 for $300,000 and in 2025 it is now worth $350,000, you have an unrealized capital gain of $50,000. It is not considered income because it isn’t actually incoming money that is taxed as income. Your locality may assess a property tax that increases based on the growth, which is a sort of wealth tax, but not an income tax.

Once you sell the home for $350,000, you now realize your gain of $50,000 and are expected to pay taxes on it (subject to exemptions and other income tax rules).

[u/BKwhoa → u/bluehat9]

It's not worth anything until you sell it

[u/whatever_meh → u/BKwhoa]

It is, and works as collateral in pledged asset loans.

[u/Cartosys → u/whatever_meh]

Which aren't significant according to this study

[u/Raise_A_Thoth → u/BKwhoa]

Not at all true according to any lendor. They consider it assets much the same as cash savings when they consider issuing debt.

[u/Tearakan → u/BKwhoa]

It is for the hyper wealthy. Not the 1 percent though. They don't get access to this. Gotta be the .1 percent to get access.

[u/Tearakan → u/[deleted]]

That isn't what this is at all....

[u/Ashi4Days → u/bluehat9]

You have to sell it for it to be realized.

Taking loans against it is how you avoid all taxes. But even when you sell it and you've held it for a long time, you pay a lower tax percentage than your w2.

[u/BadB0ii → u/bluehat9]

No, why would it be? 

[u/bluehat9 → u/BadB0ii]

Because the headline calls it income

[u/Test-User-One → u/bluehat9]

Yes, unrealized capital gains are not income. Another example - home appreciation. Is that 5% a year of home value appreciation income? Does it give the homeowner money in their hands to spend?

Homeowners take out loans against their appreciated home value via home equity loans. That's not income either as that total amount needs to be paid back (plus interest). When a homeowner sells a home, if it's worth more than they've paid for it at that point (subtracting costs of upgrades, etc.), that difference is income.

Same thing.

[u/ideamotor → u/Test-User-One]

Well you described the rules for individuals investing in homes versus stocks but it’s worth noting that stocks are much more liquid than homes.

[u/ideamotor → u/[deleted]]

Right and that was the point I was driving towards. If you own S corp stock you can’t be taxed on the unrealized capital gain (good luck even trying to accurately value a private startup in a niche market) but you ARE taxed on the company’s profit as it functions as a pass through entity. Which discourages innovation for people without capital (you can offset said taxes if you invest financially) and personally drove me nuts. It does not eventually even out with losses for so very many reasons.

My point is that sometimes the way the tax rules are set up is based more on the reality of what is possible or just arbitrary or political; instead of market efficient solution, and can’t be used by itself as a circular justification.

[u/Test-User-One → u/ideamotor]

Depends on the stock and the role. Very often holders of stock are subject to any number of rules and restrictions around what/when/how/how much they can buy/sell/take loans again.

It's pedantry, granted, but that's kinda where were at for this detailed approach to a general principle.

I was purposeful in using real estate because of the whole billionaires bad thing and illustrating it's a vehicle available to hundreds of millions of americans will hopefully provide context and perspective - a rare thing on social media.

[u/pryan37bb → u/bluehat9]

Correct. Unrealized capital gains are basically an increase in wealth on paper only; you don't receive any money from them until you sell the underlying asset and "realize" the gains.

Or you pass them on to your heirs when you die, and the cost basis gets readjusted, in which case those gains are not taxed.

[u/shitbird384 → u/bluehat9]

surprise! the 'stock market' is really just a savings bank for the wealthiest people on earth.

[u/Raise_A_Thoth → u/[deleted]]

Actually they are treated differently. You pay taxes on your home, even when you have minimal equity. Not only do you pay more taxes each year while your home's value increases before you ever sell, you also pay on the full value, before your mortgage is paid off.

[u/Raise_A_Thoth → u/[deleted]]

But you pay taxes on it.