Vice President Kamala Harrisnrecently signaled support for taxing unrealized capital gains.
The suggestion stirred up controversy and raised concerns among average folks who are trying to build wealth. But in truth, most everyday investors likely will not have to worry even if a plan to tax unrealized capital gains becomes law.
Here are the facts about what is being proposed.
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What is Harris proposing?
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Harris has expressed support for a proposal by current President Joe Biden to tax unrealized capital gains. These are gains that are "on paper" only — investors have not yet realized the gains because they haven't sold the asset that has appreciated.
Here are the basic points of the proposal:
- There would be a new tax on unrealized capital gains.
- The tax would apply only to individuals with at least $100 million in wealth who don't pay at least a 25% tax rate on their income, including unrealized capital gains. Payments could be spread out over some years.
- Individuals with at least $100 million would only pay taxes on unrealized capital gains if at least 80% of their wealth is in tradable assets. That means investments in real estate or shares of private startups would escape the tax. However, folks in these last two groups would face a deferred tax of up to 10% on unrealized capital gains upon selling the assets.
The goal is to tax the wealthiest Americans on the growth of their investments each year rather than only after they sell them.
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The tax won't impact most people
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The proposed tax on unrealized capital gains would apply only to individuals with assets exceeding $100 million, meaning most Americans would not be affected.
Most taxpayers would find that this tax would not directly impact their financial situation. The proposal specifically targets ultra-wealthy individuals, while the average investor or retiree would emerge unscathed.
Even a lot of rich people wouldn't be affected
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There are the rich, and then there are the mega-rich. If you are merely wealthy, the new tax would not impact you.
That is because most wealthy people with millions in assets are still not rich enough to meet the $100 million threshold.
Instead, most rich investors would continue paying taxes on their gains only when they realize them.
The tax will probably never become law
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Even if you have an extra $100 million sitting around, there's still a pretty good chance you will not have to worry about this type of tax.
While the proposal has garnered considerable attention, its likelihood of becoming law is slim. It would need to pass Congress, and given the current political climate, that's a tall order.
To enact this type of legislation, Democrats would likely need to take control of the presidency, the House, and the Senate.
While it is possible that Democrats could sweep November's elections, most experts view that outcome as unlikely at this moment. And it's possible that even with full government control, Democrats couldn't muster enough support to make the proposal a reality.
Even if the tax does become law, the courts might kill it
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If a tax on unrealized capital gains became law, it would almost certainly face legal challenges. Some experts have argued that it's unconstitutional.
There is no telling how courts will eventually decide the question, but there is at least a chance that the court system — including the U.S. Supreme Court — will kill the new tax.
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Bottom line
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While discussions about taxing unrealized capital gains may sound alarming, this proposal targets only the wealthiest individuals.
Such a change wouldn't affect their tax or investment strategies for most people. So, if you are ready to start investing, you probably shouldn't let this proposal deter you.
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