In a move that has sent shockwaves through financial circles, Vice President Kamala Harris, the Democratic presidential candidate, has thrown her support behind the Biden administration’s controversial Capital Gains Tax proposals, which include a staggering 25% minimum tax on total income—including unrealized capital gains—for individuals with wealth exceeding $100 million.
This plan, aimed squarely at America’s wealthiest, has been lauded by progressives but blasted by critics as unworkable, especially in the volatile markets. Jason Katz, a senior portfolio manager at UBS, didn’t mince words during a recent interview with Fox Business, calling the measure “an unmitigated disaster” and warning of its broader economic implications.
The Basics: Realized vs. Unrealized Gains
To understand the controversy, it’s essential to grasp the distinction between realized and unrealized capital gains. Realized gains occur when someone sells an asset—such as a stock or property—and profits from the sale. This profit is already subject to taxation.
Unrealized gains, on the other hand, refer to the increase in the value of an asset that hasn’t been sold yet—meaning the owner hasn’t seen any actual cash flow from it. Under current law, these gains aren’t taxed until the asset is sold. However, the new proposal backed by Harris seeks to change that, taxing even the potential increase in asset value before any sale occurs.
The Complexity of Taxing Unrealized Gains
Katz, like many financial experts, has grave concerns about the practical application of such a policy. He offered a hypothetical scenario to underscore the potential pitfalls:
“If you have a high-net-worth individual who invested $100 million in Amazon stock, and it rises to $150 million, under this proposal, they’d be taxed 23% on the $50 million gain—even though they haven’t sold the stock. But what happens if, in the next year, Amazon’s value drops back to $100 million? Will the government issue a rebate for the previous year’s taxes?”
This scenario highlights a key problem with the proposal: market volatility. In the world of stocks and other investments, values can fluctuate dramatically from year to year. Being taxed on gains that haven’t been realized in cash—especially when those gains could disappear—would be an unprecedented burden on investors.
Katz went further, predicting that such a tax would create an “accounting nightmare” and even warned that it could “suck money out of capital markets” as investors scramble to cover tax bills on assets they haven’t sold.
Real Estate and Other Asset Classes
The problem isn’t limited to stocks. Katz also raised concerns about other asset classes, like real estate. Wealthy investors often hold large portions of their wealth in property, which appreciates in value over time. Under the new plan, they’d be taxed on this increase—again, without selling the asset.
“Are real estate owners supposed to liquidate their properties to pay for taxes on unrealized gains?” Katz questioned, noting the impracticality of the policy. “It makes no sense whatsoever.”
Will This Affect Average Americans?
While the Biden administration and Harris claim the tax will only target the ultra-wealthy—those with a net worth exceeding $100 million—Katz remains skeptical. According to a report from Henley & Partners, only about 0.003% of Americans, or roughly 10,660 individuals, would fall under this tax bracket.
But the potential consequences could ripple throughout the economy. Investors with significant market influence could alter their investment strategies, pulling capital from areas that impact average Americans, such as job creation and innovation. Katz echoed the concern raised by publishing mogul Steve Forbes: “They start with targeting the wealthy, but over time, these kinds of policies tend to creep into other areas of the tax code.”
Forbes has long been an outspoken critic of increasing taxes on capital, warning that such policies ultimately hurt the broader economy by stifling investment.
A Step Too Far?
The Treasury Department has defended the proposal, claiming that “preferential treatment for unrealized gains disproportionately benefits high-wealth taxpayers.” They argue that many of America’s wealthiest citizens pay lower effective tax rates than middle-class Americans due to the way unrealized gains are currently taxed.
But critics, like Katz, remain unconvinced. They argue that taxing wealth that hasn’t been converted into cash could have unintended consequences, from market destabilization to driving wealthy Americans to seek loopholes or even move their assets overseas.
What Comes Next?
While Kamala Harris has broadly backed President Biden’s tax plans, she has indicated that she might prefer a smaller increase in the capital gains tax than Biden’s original proposal. This leaves the door open for potential adjustments, including reconsidering the controversial tax on unrealized gains.
However, with Harris now firmly in the spotlight as a presidential candidate, her tax policies will undoubtedly come under scrutiny. As this debate heats up, one thing is clear: the proposed unrealized capital gains tax is far from being a done deal, and its impact—if implemented—could reshape not just Wall Street, but Main Street as well.
