The reality of Kamala Harris' plan to tax unrealized capital gains
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Silicon Valley was burning up the socials this week, after learning that Kamala Harris has tacitly endorsed a tax on unrealized capital gains. Lots of what was shared was inaccurate.
Reality check: This only would impact a small subset of America's wealthiest people, and most tech founders and investors would be spared.
What to know: Harris didn't release a new tax plan. Instead, her campaign said it agrees with a series of items in President Biden's last budget proposal, the most relevant of which were nonstarters in Congress and didn't become law.
- This includes the new tax on unrealized capital gains.
- It applies only to individuals with at least $100 million in wealth who do not pay at least a 25% tax rate on their income (inclusive of unrealized capital gains). Payments can be spread out over subsequent years.
- Within that $100 million club, you'd only pay taxes on unrealized capital gains if at least 80% of your wealth is in tradeable assets (i.e., not shares of private startups or real estate). One caveat for this illiquid group is that there would be a deferred tax of up to 10% on unrealized capital gains upon exit.
- In short, it would not apply to most startup founders or investors. If any group should be tweeting mad face emojis, it's top hedge fund managers.
How we got here: Given that this is really Biden's plan, I spoke with an administration official about it.
- He says that the proposal is designed "to address substantial inequities in our tax system," whereby the wealthiest often pay lower rates than do the regular rich and middle class. The old Warren Buffett vs. his secretary argument.
- The fact that it also is projected to raise $500 billion over 10 years was important, but secondary, to Biden.
- "Economists across the political spectrum agree that when a billionaire's wealth goes up by a large amount of money, it's income even if it's not cash in a bank account," the White House official argues. "They often borrow against their assets and use it as disposable income."
- When asked if a tax on such loans was discussed as an alternative, he declined to answer. The Harris campaign didn't return an interview request.
The big picture: This would be a major philosophical shift in U.S. tax policy.
- America doesn't typically tax unrealized gains, except in edge cases like futures contracts, securities dealers and those expatriating. It just doesn't feel right to tax people on money they don't have.
- That said, there isn't reason to believe it would have much negative impact on startup formation or investment. Show me someone without $100 million — realized or unrealized — who'd turn it down because of taxes, and I'll show you a phantom.
- Plus, the vast majority of startup investment comes via institutions, not individuals. And if the carried interest loophole is ever closed, which Harris also supports via Biden, then it wouldn't be a capital gain anyway.
Yes, but: The rule could create some perverse incentives, such as discouraging some startup founders from taking their companies public.
- There's also a slippery slope concern; the big mental and legislative hurdle is taxing unrealized capital gains — after that, lowering the threshold below $100 million would be easier, even if not currently on the table.
State of play: Democrats would need to sweep in November to have any shot of enacting this rule, likely as part of negotiations tied to the expiration of some 2017 tax cuts.
The bottom line: In the unlikely event this becomes law, it's a much smaller deal than the likes and retweets would have you believe.
