Unrealized capital gains tax stock Bitcoin

Bitcoin HODLers live according to the words of the 1987 Rick Astley hit “Never Gonna Give You Up”. Many have held their stack for years by dropping steeply in price just to see the price climb to new highs each year. As opposed to short-term trading, it’s a buy-and-hold investment strategy that seems to work.

Janet Yellen doesn’t care.

Treasury Secretary Janet Yellen announced on Oct. 23 that a proposed tax on unrealized capital gains – yes, gains on investments that haven’t even been sold – could help President Biden’s now reduced social spending bill of $ 1.75 trillion finance. Senate Finance Committee Chairman Ron Wyden came up with the idea that would fundamentally change the way US citizens are taxed.

If Yellen and the US Congress have its way, wealthy investors could be taxed on those unrealized gains, the appreciation of their wealth. The tax would apply to all “owners,” which include stocks, real estate, gold, and even cryptocurrencies like Bitcoin. Cryptocurrency is not viewed as currency by the IRS, but as property. Every time you sell or spend cryptocurrency, you have a taxable transaction that results in either a capital gain or a capital loss.

Janet Yellen Photo Politico.com

The attempt would be an attempt to extract more taxes from America’s wealthiest families by imposing a tax on assets that have been upgraded but not yet sold. Wyden’s plan would be

apply to those with assets over $ 1 billion or to those who have earned over $ 100 million for three consecutive years. It’s easy to check income on tax returns, but assets, well, that gets a little more complicated. Some assets are publicly valued, but many are not.

Some congressmen do not appear to be thrilled that some wealthy people have little or no current income, pay no taxes, and still grow their wealth exponentially over time. Currently, the super-rich can hold assets that are appreciating, not selling them, but can finance their lifestyles by borrowing against their huge holdings. It makes perfect sense as we are in a lengthy streak with interest rates close to zero percent. Unsurprisingly, Congress is not happy about this.

It should be noted that the scheme to tax unrealized gains does not equate to a “property tax” of the type proposed by Senator Elizabeth Warren. A wealth tax would be levied on the value of all assets, not just those that have increased in value. The two taxes are similar but definitely different. House spokeswoman Nancy Pelosi, herself one of the wealthiest investors in Congress, said last Sunday, “We are likely to levy a property tax” to show she doesn’t understand the difference.

How complex could this tax get?

As a professional accountant, I can anticipate many of the complications that can arise from imposing a tax on unrealized capital gains.

1. reviews. Every fortune of these wealthy people would have to be re-evaluated every year. Valuing a closely run business is both an expensive and time-consuming process. There is no way that these assessments can be done in time each year to be included on a tax return. (Think of someone like former President Donald Trump, who has stakes in over 500 closely related companies.)

2. subjectivity. Not all assets are easy to value. Sure, everyone knows how much Jeff Bezos’ stocks appreciate on Amazon every year, and so does Elon Musk. Bitcoin stocks are also easy to evaluate. These assets are all publicly traded. That is poor fruit for this type of tax. But, as with the closely related companies mentioned above, it’s also not easy to value assets like works of art, wine collections, yachts, and airplanes. Who says what a Picasso piece is worth this year? Of course there is a lot of subjectivity involved. Real estate is also difficult to evaluate and is subject to many factors.

3rd reporting. How would the value of these assets be reported? Brokerage houses would have to issue forms at the end of each year detailing the market value of all assets, which would undoubtedly lead to some rejection. Do other custodian banks also have to report? Cryptocurrency exchanges, for example? Keep in mind that many US citizens buy their cryptocurrency on foreign exchanges that are not regulated by the US Treasury Department. Not to mention the millions of owners who keep their Bitcoins safe! The IRS may not be aware of this.

4th liquidity. Taxpayers like Jeff Bezos and Elon Musk have essentially all of their fortune in the stocks of the companies they run. To pay an annual tax on the value of these stocks, one would undoubtedly have to sell some of the stocks. The asset markets may need to go through an annual sell-off period to generate cash for the new tax. The IRS currently only accepts US dollars for tax payments. They will also not accept Bitcoin or other cryptocurrencies. Thus, the tax would also lead to some sale of digital assets.

Where should all this lead? Exams: This would result in lengthy, complicated tax audits with extensive litigation, appeals, and settlements. The wealthy can and do hire the best tax attorneys available, so this process would continue for years without resolution. Congress can expect tax revenues to flow smoothly into the treasury, but it is by no means likely to turn out that way.

Photo Polstontax.com

Photo Polstontax.com

Here is another question related to such a tax. Would unrealized losses count in favor of the taxpayer? Would those assets that are depreciating in value be netted against those that are increasing in value, thus taxing the aggregate net increase? It is not yet clear.

Could losses in value be attributed to increases in value and thus generate enormous tax refunds in the coming years? The 2018 bitcoin bear market comes to mind when the price of a bitcoin fell from over $ 19,000 to around $ 3,300, an 80% loss in value. (Think also of years of stock market crashes a la 2008-2009.) There is no doubt that the Treasury Department will not want to cut reimbursement checks for the rich. These are enormously complicated things that are obviously not well thought out.

Another major problem with a proposed tax on unrealized capital gains would be enforcement. The Internal Revenue Service currently cannot even answer calls from taxpayers or tax professionals. You cannot reply to correspondence within a year. Where are all these law enforcement officers supposed to come from? Not to mention that every company in the country faces a labor shortage.

The constitution test

The 16th Amendment to the US Constitution allows the taxation of “income,” and this phrase has led to a long history of litigation involving various forms of taxation. Case law has stated that something that is defined as income has to do with the person being in complete control of the source of money and being able to use it as they see fit. That doesn’t really fit into the unrealized gains situation. Even to pay this tax some liquidity money would be required from the investment.

The wording of the amendment, if taken literally, appears to allow only income taxes and certainly no wealth taxes. Whether an increase in wealth represents income on paper will be a question for the courts.

Photo Occupy.com

Photo Occupy.com

Does it stop with billionaires? What about state taxes?

The Revenue Act of 1913 imposed income tax on individuals with income over $ 3,000. Adjusted for inflation, that’s around $ 75,000 in today’s dollars. The tax affected approximately 3% of US citizens. Obviously, income tax grew and grew until it affected over 50% of citizens, and Social Security and Medicare taxes came on top of that, so almost

every worker pays taxes. And that is the fear of either a wealth tax or a tax on unrealized capital gains. How fast would that tax decrease to hit more and more taxpayers?

Taxing a few hundred billionaires is a step, but like income tax, the real money rests with the general public. Tax hikes for the rich can only bring in so much.

Here’s a scary thought: could this tax one day be applied to the value of people’s retirement accounts? This is not currently on the congressional table, but some members have expressed outrage at the enormous sums of money some wealthy people have amassed in IRA accounts.

Creepy thought number two: will states follow suit? Oh boy, would New York and California be next in line to grab a piece of that cake? It could happen.

What about company?

So far there has been no question of levying this tax on corporate assets. Rather, a proposal is circulating that would impose a minimum tax of 15% on all companies, as the previous alternative minimum tax was repealed in 2017.

An unrealized capital gains tax on corporate assets could hit property owners particularly hard, but Bitcoin companies also come to mind. Michael Saylor’s publicly traded company MicroStrategy is currently sitting on unrealized gains of over $ 2 billion from its bitcoin stack. The same goes for Tesla and Square and many others.

If this unrealized profit tax wasn’t imposed on corporations then I can see some Bitcoin whales investing their stacks in a corporation with the help of some crafty tax attorneys.

Passage chances?

At this point in time, there is no indication of what the odds are that this tax will pass Congress. With a narrow majority of the Democrats in the House of Representatives and the Senate, this seems entirely possible. And since the expense bill has already been cut from its original price of $ 3.5 trillion, the odds are better. The House and Senate votes are expected before Thanksgiving.

One thing is certain: if a tax is levied, those affected will do everything to avoid it.

Leonard Burman, Co-Founder of the Tax Policy Center, said:

“When you have a threshold, you are giving people a really strong incentive to rearrange their affairs to keep their incomes and assets below the threshold.”

This is a guest post by Rick Mulvey. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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