Harris’s Capital Gains Tax Plan: Understanding the 25% Minimum Tax on Unrealized Investment Gains

Capital gains taxes play a key role in the U.S. tax system, applying to profits from investments like stocks, bonds, and real estate. Currently, taxes are only owed when an asset is sold and the gain is realized. However, Vice President Kamala Harris has proposed a 25% minimum tax on unrealized capital gains, for individuals with a net worth of $100 million or more, meaning these individuals would be taxed annually on the increase in the value of their assets—even if they have not sold them.

The proposal, originally introduced by President Biden in 2022, has sparked intense debate. Supporters argue that it would promote tax fairness and help reduce wealth inequality by ensuring that the wealthiest Americans contribute a more significant share of their income to the tax system. On the other hand, critics warn that such a tax would create an “accounting nightmare”, discourage investment, and cause market volatility. Some, like Jason Katz of UBS, have expressed concerns that the tax could lead to “massive bills for gains that could easily disappear the following year”.

As policymakers and financial experts continue to weigh the pros and cons, Harris’s proposal raises important questions about the future of tax policy, the feasibility of taxing unrealized gains, and the broader economic implications for investors and the market at large. This article will explore the fundamentals of capital gains taxes, the details of Harris’s plan, and the ongoing debate surrounding its potential impact on wealth inequality and investment behavior.

What Are Capital Gains Taxes?

A capital gains tax is a tax on the profit made from selling an asset, such as stocks, real estate, or bonds. The tax is calculated based on the difference between the asset’s sale price and its original purchase price, known as the cost basis. Capital gains taxes are an essential part of the U.S. tax system, applying only when a profit is realized through a sale, which means gains that remain “on paper” do not currently trigger tax obligations.

Key Factors Affecting Capital Gains Taxes:

1. Holding Period: The tax rate depends on how long the asset was held before being sold.
   • Short-term capital gains apply to assets held for one year or less and are taxed as ordinary income, at rates ranging from 10% to 37%, depending on the taxpayer’s income bracket.
   • Long-term capital gains apply to assets held for more than one year, taxed at lower rates—typically 0%, 15%, or 20%, depending on the filer’s income.
     
2. Taxable Income: The taxpayer’s overall income also determines the tax rate for long-term capital gains, with higher earners facing higher rates.
   
3. Filing Status: Single filers, married couples filing jointly, and other statuses influence the tax bracket and the corresponding capital gains tax rate.
   
4. Type of Asset: Some assets, such as collectibles, may be taxed at different rates.

Capital Gains Tax Strategies

Investors often use strategies to minimize their capital gains tax liability, including:

• Holding assets longer than a year to benefit from lower long-term capital gains rates.
• Tax-loss harvesting, which involves selling investments at a loss to offset gains in other areas, reducing overall tax exposure.
• Tax-advantaged accounts, like 401(k)s and IRAs, where gains are shielded from taxation until funds are withdrawn.

Under the current system, taxes on capital gains are only triggered once the asset is sold, which allows investors to defer taxes by holding onto appreciating assets. This is where Harris’s proposed tax on unrealized gains departs sharply from the existing approach.

Harris’s Proposal: A Tax on Unrealized Gains

Vice President Kamala Harris has introduced a tax proposal that represents a significant shift from the current capital gains tax framework. Her plan calls for a 25% minimum tax on unrealized capital gains for individuals with a net worth exceeding $100 million. Unlike the current system, where taxes are only owed when an asset is sold and the gain is realized, Harris’s plan would require the ultra-wealthy to pay taxes on the annual appreciation of their assets, even if they haven’t sold them.

Key Features of Harris’s Plan:

1. Targets the Ultra-Wealthy: The tax would primarily impact the top 0.01% of U.S. households, applying only to individuals with a net worth greater than $100 million. This includes investors with substantial holdings in stocks, bonds, real estate, and privately held businesses.
2. 25% Minimum Tax: The proposal introduces a minimum tax rate of 25% on total income, including unrealized capital gains. This aims to have high-net-worth individuals contribute a more consistent share of their income in taxes each year, regardless of whether they sell their assets.
3. Deferred Payments for Non-Publicly Traded Assets: One provision allows individuals with significant holdings in non-publicly traded assets to defer tax payments until the asset is sold, with an interest-like charge applied during the deferral period. This flexibility aims to address concerns about taxing illiquid assets, such as shares in privately held businesses.
4. Payment Over Time: To mitigate the risk of large tax bills due to volatile asset values, taxpayers could spread the payment of taxes on unrealized gains over multiple years, easing the financial burden during periods of fluctuating valuations.

Connection to Biden’s 2022 Proposal

Harris’s plan builds on a similar proposal originally put forward by President Biden in 2022. Biden’s administration estimated that taxing unrealized gains could raise approximately $500 billion in revenue over ten years, which would help fund government initiatives while also targeting wealth inequality. While Harris’s version is a continuation of this broader effort, it specifically targets the wealthiest individuals, with an emphasis on ensuring they pay a more significant portion of their income in taxes, even if they avoid selling assets.

Who Would Be Affected by the Unrealized Gains Tax?

As previously mentioned, Harris’s proposed unrealized capital gains tax would primarily target the wealthiest 0.01% of U.S. households. These individuals typically hold significant investments in stocks, bonds, real estate, and privately held businesses. Under the plan, they would be taxed annually on the increase in the value of their assets, regardless of whether the assets are sold

Key Groups Affected:

1. High-Net-Worth Individuals: Investors with large portfolios of publicly traded assets would be subject to the tax on their unrealized gains each year, unlike the current system where taxes are deferred until the sale of the asset.
   
2. Business Owners and Private Investors: Wealthy business owners with holdings in privately held companies would also be impacted. However, Harris’s plan includes a provision to defer payments on these non-public assets until they are sold, with an interest-like charge applied during the deferral.

Potential Impacts:

1. Increased Tax Burden: Those affected would face a higher tax liability, paying taxes on gains even if they choose not to sell their assets. This marks a significant departure from the tax deferral strategies typically used by high-net-worth individuals.
   
2. Market Disruptions: As mentioned above, critics argue that taxing unrealized gains could lead to market instability. Wealthy investors might feel pressured to sell assets prematurely to cover their tax bills, potentially leading to market volatility. Additionally, this proposal would present accounting challenges, especially in cases where asset values fluctuate dramatically.
   
3. Potential Wealth Migration: There are concerns that some high-net-worth individuals might move their assets or residency to countries with more favorable tax policies to avoid paying taxes on unrealized gains, leading to capital flight and reducing domestic investment.

Arguments in Favor of the Unrealized Gains Tax

Proponents of Harris’s plan argue that it would address critical issues in the U.S. tax system, particularly by ensuring that the ultra-wealthy contribute a fairer share of their income through the taxation of unrealized gains. Currently, many of the wealthiest individuals can delay or avoid taxes by holding onto appreciating assets indefinitely, deferring tax payments until the assets are sold. By taxing unrealized gains, Harris’s proposal seeks to close this loophole and reduce wealth inequality.

Key Arguments in Favor:

1. Promoting Tax Fairness: The current system allows the wealthiest to avoid paying taxes on substantial portions of their income by simply holding assets. This proposal would ensure that high-net-worth individuals, whose wealth often grows through capital gains, are taxed more similarly to wage earners who pay taxes on all of their income.
   
2. Raising Substantial Revenue: Harris’s unrealized gains tax is projected to raise significant revenue—estimated at $500 billion over ten years, according to the Biden administration’s earlier proposal. These funds could be used to finance various government programs, from infrastructure to social services, without increasing taxes on the middle class.
   
3. Reducing Wealth Inequality: By taxing unrealized gains, the plan would help reduce the massive disparities between the ultra-wealthy and the rest of the population. Since a large part of the wealth accumulation by the top 0.01% comes from capital gains, this tax would prevent them from indefinitely avoiding taxes on growing asset values, helping to narrow the wealth gap.

Countering the Lock-In Effect:

Another benefit of taxing unrealized gains is that it may reduce the “lock-in effect,” where investors hold onto appreciated assets solely to avoid paying taxes. By imposing an annual tax, the incentive to hold assets long-term purely for tax purposes could be diminished, potentially increasing market liquidity.

Arguments Against the Unrealized Gains Tax

While Harris’s proposal has its supporters, critics argue that taxing unrealized gains would introduce significant practical challenges and unintended economic consequences. The plan has raised concerns over the feasibility of implementing such a tax, its impact on investment behavior, and its potential to create market instability.

Key Arguments Against:

1. Administrative and Accounting Challenges: One of the biggest hurdles with taxing unrealized gains is accurately valuing assets annually, especially those that are non-publicly traded. Critics warn that this could lead to taxpayers facing large tax bills based on fluctuating asset values. For instance, if asset values drop after a year of being taxed, it raises questions about whether and how taxpayers might recover taxes paid on what later proves to be phantom gains.
   
2. Market Instability and Investor Behavior: There is concern that the tax could discourage investment and cause market volatility. Faced with the need to pay taxes on gains that haven’t been realized, investors might feel pressured to sell off assets prematurely, leading to instability in financial markets. Erica York, senior economist and research manager at the Tax Foundation’s Center for Federal Tax Policy, cautions that the policy “poses significant administrative and compliance challenges,” including liquidity concerns and the risk of IRS disputes. York adds, “I still think it ends up being an unworkable proposal”
   
3. Potential for Wealth Relocation: Another concern is the risk of capital flight, as wealthy individuals might shift their assets or change their residency to countries with more favorable tax policies. By doing so, they could avoid the U.S. tax on unrealized gains entirely. This migration of wealth could reduce domestic investment and drain the U.S. economy of capital resources.
   
4. Fairness Concerns: Some opponents believe that taxing unrealized gains is inherently unfair. Asset values can be highly volatile, particularly in sectors like technology or cryptocurrency, where swings in market value are common. Taxpayers could face large bills for gains that might disappear later, leading to unfair tax liabilities. This unpredictability makes the proposal especially controversial in industries with high volatility.

Conclusion

The proposal to tax unrealized capital gains marks a bold shift in U.S. tax policy, sparking significant debate about its potential benefits and challenges. Supporters argue that it addresses a longstanding gap in the tax system by targeting the ultra-wealthy who accumulate untaxed wealth through the appreciation of their assets. By doing so, it could raise substantial revenue—an estimated $500 billion over the next decade—and contribute to reducing wealth inequality without impacting the broader middle class.

However, critics warn of serious downsides. These include market disruptions, as investors may be forced to sell assets prematurely to cover tax obligations, and administrative difficulties, particularly in valuing illiquid assets like privately held businesses. The risk of capital flight, with wealthy individuals moving their assets or relocating to lower-tax jurisdictions, further complicates the policy’s potential effectiveness.

As the debate continues, it remains to be seen whether taxing unrealized gains will gain enough political traction to become law and whether it will have the intended impact on closing the wealth gap and increasing government revenue.