As the Harris presidential campaign picks up steam, talk of an unrealized capital gains tax is making its way back into political discourse. However, for many in the financial world, this chatter may be much ado about nothing.
Raymond James’ Chief Investment Officer, Larry Adam, recently dismissed the potential impact of these proposals during an appearance on Yahoo Finance’s Opening Bid podcast. Adam highlighted the impracticality of calculating unrealized gains, stating, “I don’t think this unrealized thing is going to have much momentum because it is a very onerous process to come up with those numbers.” He pointed out the subjective nature of valuing assets, adding, “You start putting biases of what you think [something] is worth versus the reality. That becomes a very difficult equation to really put into place.”
Unrealized Gains Tax: A History of Resistance
Unrealized capital gains tax proposals are not new, but they have historically faced significant pushback. The Biden administration recently floated a proposal targeting individuals with a net worth of over $100 million, potentially impacting more than 10,600 people across the United States. Yet, the complexities of implementing such a tax are considerable.
Unlike traditional capital gains taxes, which apply only when assets are sold, taxing unrealized gains involves estimating the value of assets that haven’t been sold—a far more complicated and controversial endeavor. Stifel’s Chief Washington Strategist, Brian Gardner, noted in a client memo that “ranking illiquid assets would not only be complicated but controversial.” He further emphasized the need for mechanisms to allow taxpayers to claim rebates for future losses, highlighting another layer of complexity in implementing such a tax.
Opposition from High-Profile Figures
The proposal has drawn criticism from notable figures across the political and business spectrum. Former President Donald Trump has labeled it “beyond socialism,” arguing that it could force small business owners into dire financial straits. His former Commerce Secretary, Wilbur Ross, echoed this sentiment, calling the idea “ridiculous” on Yahoo Finance’s Opening Bid.
Tesla (TSLA) CEO Elon Musk has also been vocal in his opposition, claiming that an unrealized capital gains tax could lead to economic conditions akin to “bread lines and ugly shoes.”
While these statements may seem hyperbolic, they underline the broader market concerns about the potential impacts of such a tax. Raymond James’ Larry Adam, for example, warns that regardless of the tax proposal, higher taxes overall could reduce household incomes by as much as $2,000, representing a significant drag on the economy. “It could be a big impact,” Adam observed.
Tax Policy and the Road Ahead
Both major presidential candidates face significant tax policy challenges ahead of the 2025 expiration of key provisions of the 2017 tax cuts. Trump has promised to extend these cuts and possibly introduce further reductions, while Harris has advocated for expanding the child tax credit and increasing taxes on individuals earning over $400,000 per year, without increasing the capital gains tax.
Yet, despite the noise, Adam remains skeptical about the likelihood of an unrealized capital gains tax passing. “There’s a low probability of it passing,” he stated, pointing to the inherent difficulties in marking assets to market every year for tax purposes.
Key Takeaways
- Implementation Challenges: An unrealized capital gains tax would be difficult to implement due to the complexities involved in valuing illiquid assets and the need for mechanisms to address future losses.
- Resistance Across the Board: There is significant opposition from both political figures and the business community, including high-profile critics like Donald Trump and Elon Musk.
- Potential Economic Impact: Even without an unrealized gains tax, the prospect of higher overall taxes could have a substantial negative impact on household incomes and economic growth.
- Policy Uncertainty: The outcome of the 2024 presidential election will significantly influence future tax policy, with both Harris and Trump proposing different approaches to handling the expiration of 2017 tax cuts.
Conclusion
For traders and investors, the discussion around unrealized capital gains taxes might seem like a lot of noise with little substance. The practical difficulties in valuing assets annually, along with substantial political and business resistance, suggest that such a tax is unlikely to gain traction soon. However, with the political landscape rapidly evolving and tax policies under the microscope, staying informed and prepared for any eventual changes remains crucial.
