Unrealized Gains Tax: One Important Thing to Know Now

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last updated 21 October 2024

Unrealized gains have been a hot topic recently. That is particularly true given the upcoming presidential election, which has spotlighted divisions over tax fairness and how and when wealth and investment income should be taxed.

For example, President Biden's most recent FY25 budget proposal calls for nearly doubling the capital gains tax rate and for taxing unrealized gains, particularly for the ultra-wealthy. And, as Kiplinger has reported, there’s a lot of talk on social media lately about whether Democratic presidential nominee Vice President Kamala Harris will pursue a fictitious “golf tax” or unrealized gains proposals similar to Biden’s. And Mark Cuban, who recently endorsed Harris has weighed in on the issue.

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So, it is important to understand what unrealized capital gains are and how they may or may not impact you as a voter and investor. Let’s dive in.

What are unrealized gains?

An unrealized gain occurs when the value of an asset you own increases, but you haven't sold the asset yet. So, the gains are what some call “paper gains” since they haven’t been realized in a tangible way but exist on paper.

For example, if you buy stock for $100 and its value rises to $150, you generally have an unrealized gain of $50. That gain would become "realized" when you actually sell the stock.

However, the most important thing to know now is that under current U.S. tax law, investors are generally taxed on realized gains. So, what’s the issue?

Plan to tax unrealized gains

Since generally only realized gains are taxed in the U.S., some argue that this allows the already ultra-wealthy to accumulate more wealth while avoiding paying their “fair share” of taxes. (For instance, billionaires can typically avoid income taxes by living off loans secured by appreciated assets rather than selling those assets, which would trigger capital gains taxes.)

With that in mind, President Biden proposed a "Billionaire Minimum Tax" that would impose a 25% minimum tax rate on total income for households with over $100 million in assets. The White House has said this would affect only a tiny fraction of taxpayers but could raise significant revenue. (At a campaign rally in New Hampshire, Harris recently expressed support for a Billionaire Minimum Tax, though it's unclear whether her proposal would mirror Biden's.)

Biden also proposed taxing unrealized gains at death. If ever approved (more on that later), this proposal would essentially end the practice of “stepping up” the basis for gains exceeding $5 million for single filers and $10 million per married couple.

Note: Stepped-up basis involves raising the cost basis in appreciated inherited assets to the fair market value at the time of the decedent’s death. Since cost basis helps determine tax amount, stepping up the basis typically minimizes the capital gains taxes owed.

Under current tax law, these accumulated gains can generally be passed down across generations untaxed.
The Biden administration says this exacerbates inequality since the practice tends to benefit the wealthy.

Under Biden’s budget proposal, the IRS would tax those gains if the appreciated property isn’t donated to charity. Additionally, the administration has said the change would be designed so that family-owned businesses and farms are not taxed when giving to heirs who continue running the business. Other exceptions would apply involving certain heirs for example.

What happens if unrealized gains are taxed?

Some critics argue that taxing unrealized gains is unfair and could have negative economic consequences. For example, opponents contend that such proposals:

Tax "paper gains" that may never materialize if asset values decline
Could force asset sales just to pay taxes, disrupting markets
Might discourage long-term investment and risk-taking

Other opponents point to the administrative complexity of valuing non-liquid assets every year. And, of course, there are significant legal questions. Are taxes on unrealized gains constitutional?

Earlier this summer, a majority of the U.S. Supreme Court justices upheld a mandatory repatriation tax enacted during the Trump administration that many saw as a “wealth tax.” However, the court left the door open to potentially invalidate future wealth taxes — like a tax on unrealized gains.

For more information on that case, see Kiplinger’s report: Tax on Unrealized Gains Survives Supreme Court.

The Election: Project 2025, Harris unrealized capital gains

The treatment of unrealized gains has become a key point of debate in the current 2024 election cycle. For example, Some Democrats generally support expanding taxation of unrealized gains for the very wealthy. Meanwhile, some Republicans generally oppose these measures, seeing them as unconstitutional or government overreach.

So, you may have heard that Vice President Kamala Harris’ campaign generally indicated support for President Biden’s FY25 tax proposals. Some of those ideas are broadly outlined in the Democratic Party Platform for 2025, though not yet fully outlined by Harris in her campaign's economic plan.
At a rally on September 4, Harris called for a 28% capital gains tax rate for those earning one million dollars or more a year.
Additionally, Project 2025, widely considered a governing blueprint for the next Republican president, proposes a 15% tax on capital gains and dividends.

However, it’s important to remember that any major changes to tax policy would need to pass through the U.S. Congress. Given deep political divisions and the balance of power, it’s hard to see a controversial proposal like taxing unrealized gains gaining bipartisan approval to pass.

Also, for most investors, unrealized gains taxes are not an immediate concern since current theoretical proposals target only the ultra-wealthy. And, as mentioned, the courts would likely weigh in on constitutionality concerns.

Still, since wealth inequality in the U.S. is an issue, debates over plans to tax unrealized gains will likely continue. Social media frenzy may also cause some to worry about a "slippery slope," leading to the broader application of these tax proposals going forward.

Regardless of the election outcome, it’s good to stay informed about current capital gains tax rates and rules, including the capital gains tax exclusion for home sales for example. If tax policy and laws change, consult a financial advisor or tax planner to help optimize your tax strategies.

As the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist.