Is Unrealized Gain Taxable? Understanding Kamala Harris’ Proposal

Kamala Harris’ proposed tax on unrealized capital gains could have far-reaching consequences, impacting not only the wealthiest Americans but potentially expanding to include the middle class. Unrealized gains, which refer to the increase in value of an asset that hasn’t been sold, are currently not taxed under the U.S. tax code. However, Harris’ plan aims to change that.

Currently, the IRS only taxes gains when they are realized, meaning the asset is sold and the gain is converted into income. For more information, refer to the IRS Capital Gains and Losses page, which clarifies the difference between realized and unrealized gains. But Harris’ proposal would tax these unrealized gains annually, forcing taxpayers to calculate the value of their assets—stocks, real estate, and other investments—every year. This raises important questions: How will valuations be determined? Will the IRS establish a new department to oversee asset valuations, or will taxpayers be responsible for reporting them?

Are Unrealized Gains Reported on Tax Returns?

Under the current IRS rules, unrealized gains are not reported on tax returns. However, Harris’ proposal would require individuals to report these gains annually. For example, property values fluctuate based on market conditions, making it difficult to establish a consistent valuation. You can learn more about how asset valuations work under existing tax laws in the IRS instructions on capital asset reporting.

The IRS would need to create detailed guidelines on how and when to report these gains, and taxpayers might be required to adjust their reports multiple times per year as asset values change. This could lead to inaccurate or manipulated reporting, as taxpayers attempt to undervalue their assets.

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Do You Pay Taxes on Unrealized Losses?

One of the critical concerns with this proposal is how it handles unrealized losses. Currently, taxpayers are not required to report unrealized losses, as losses are only recognized when the asset is sold. Under Harris’ plan, unrealized gains would be taxed, but depreciating assets could reduce the taxpayer’s net wealth, potentially leading to a refund of taxes paid on prior unrealized gains. The IRS provides a clear distinction between recognized gains and losses in Publication 544, Sales and Other Dispositions of Assets.

This opens up potential loopholes—individuals could strategically sell underperforming assets or take on debt to reduce their taxable net wealth. This type of financial behavior could lead to “loss harvesting”, a strategy where individuals intentionally sell assets at a loss to offset future tax liabilities. Without clear valuation deadlines or firm rules for how losses are treated, this could further complicate the tax code and create new challenges for both taxpayers and the IRS.

How the Unrealized Gains Tax Could Expand

Historically, once a tax is introduced, it often expands. In the U.S., taxes that were originally applied to a small group, such as excise taxes on alcohol and tea or income taxes during the Civil War, eventually broadened to affect most Americans. Harris’ unrealized gains tax could follow a similar path. For historical context on taxation, you can visit the IRS History of the Income Tax.

While initially aimed at high-net-worth individuals, the infrastructure established to enforce this tax could easily be adapted to cover middle-class Americans in the future. This could lead to increased financial pressure on households that already pay income, state, and sales taxes. As noted by tax experts, “The creation of a tax on unrealized capital gains sets a precedent that could easily be expanded to other wealth levels when Congress deems it necessary.”

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