The Lunacy of Taxing Unrealized Gains

Why Would Anyone Even Think It’s a Good Idea? [Morning Reckoning] May 02, 2024 [WEBSITE]( | [UNSUBSCRIBE]( The Lunacy of Taxing Unrealized Gains Asti, Northern Italy May 02, 2024 [Sean Ring] SEAN RING Good morning Reader, My goodness, I didn’t think I could hate the present administration more than I already do. It’s a fountain of idiotic ideas, starting with shutting down the Keystone XL pipeline to just sending $61 billion to Ukraine. You may as well just set the money on fire. Everything Boneheaded Biden has done has made things more expensive. And don’t give me, “Well, inflation has come down!” If a product costs $1 in 2021 and then suffers from 10% inflation in 2022 and 5% in 2023, it’ll cost $1.16 right now. So the inflation rate may have come down, but prices sure as hell haven’t. Politicians and WSJ writers still don’t get that. They’re still confused about why The Great Unwashed is so peeved. But if you think practically everything Joke Biden has done so far is counterproductive, wait until you hear this one. The Biden administration wants to apply capital gains tax to unrealized gains. [ SELL-OFF WARNING ]( [The stock market is entering a cycle of HISTORIC manipulation.]( Prices have surged recently… But when this trend reverses – and trends always do… Millions of investors could be on the wrong side of [a historic “pump-and-dump”.]( That’s exactly what I believe is happening behind the scenes – Wall Street is propping the market up. And within the next week or two… I believe we are going to see a historic selloff. [Click Here To Learn Why]( [LEARN MORE]( What Are Unrealized Gains? First, let’s define what they want to tax. Let’s say you buy a stock for $10. Over a few months, the stock price grows to $18. You now have an $8 capital gain, but it’s not realized. You haven’t sold the stock yet to realize the gain. Therefore, you have an $8 paper gain, also known as an unrealized or uncrystalized gain. Under the current tax system, you pay no tax on this unrealized $8 gain. Let’s say your stock later rises to $20. You’re thrilled as your stock has doubled. Now, you want to sell at $20. Since you bought the stock at $10 and sold it at $20, you realized a $10 capital gain. The IRS will kindly ask you to pay capital gains tax (CGT) on the $10 gain. If you’ve held the stock for less than a year, it’ll be taxed as ordinary income. If you’ve held the stock for over a year, it’ll be taxed at either 0%, 15%, or 20%. For the sake of this example, let’s say you’re in the upper tax bracket of 20%. That means you’ll pay $2 to the IRS because they said so. I don’t like CGT any more than I like any other taxes. But at least in the current system, you have the cash to pay the tax. What Bumbling Biden and his buffoons want to do is tax you on gains before you’ve sold the shares. It’s asinine. Let me show you. Going back to our example, let’s say on December 31, 2024, the stock price stood at $18 after you had bought it earlier in the year at $10. The IRS would want $1.60 from you (20% of the $8 gain). Since you didn’t sell the shares, I hope you have some spare cash around! Why Would Anyone Even Think It’s a Good Idea? No one does except the idiots in the West Wing. The only reason to consider it a good idea is if you’re a leftist redistributionist. That is, if you’re into confiscation, theft, and thievery. Because that’s all this is. Of course, the leftists in DC will say how taxing unrealized gains is one way of getting money out of the rich’s hands. Stop it. Governments can’t do that because if the people in the government were smart enough to do that, they wouldn’t be working for the government. The Reasons Against It There are some excellent reasons to ensure your congressman never votes in favor of this stupidity. Violation of the Ability-to-Pay Principle: One of the fundamental principles of taxation is the ability-to-pay principle, which states that taxes should be levied according to a taxpayer’s ability to pay. Taxing unrealized gains violates this principle because the gain is not actual income until the asset is sold. And yes, I’d argue it’s not “income” to be taxed anyway. Individuals can have significant unrealized gains but little cash to pay the tax. Let’s go back to our example, except our stock got FDA approval on December 31, 2024, for a new drug treatment they created. The stock went from a paltry $10 to a meaty $160. That’s a $150 unrealized capital gain. Twenty percent of that is $30. What if you don’t have $30 lying around? That’s massive trouble for you. Potential for Double Taxation: Unrealized gains are often subject to double taxation. When the asset is eventually sold, the gain is taxed again as a realized gain. This double taxation is seen as unfair and punitive. Watching the IRS calculate the unrealized and realized capital gains would be a nightmare for anyone trying to be honest and pay their taxes. Disincentive to Invest: Taxing unrealized gains could discourage investment. The prospect of being taxed on profits that have yet to be realized might deter individuals from investing, which could have broader economic growth and development implications. The other problem is the forced selling of stocks from December through April so people can pay their capital gains taxes. Market Volatility: Market volatility can make the value of investments move quickly. An asset might increase in value one year, leading to a tax on the unrealized gain, only to decrease in value the next year. This could result in individuals paying tax on gains that they ultimately do not realize. Let’s go back to our example. On December 31, 2024, our stock just got FDA approval for a new drug treatment they created. The stock had gone from $10 to $160. That $150 difference is an unrealized capital gain. Twenty percent of that is $30. You have the cash and dutifully pay $30, even though you haven’t sold the stock yet. Now, let’s say in 2025, the stock tanks back down to $10. You froze, praying to the market gods that the fall would stop, so you didn’t sell. Do you get the $30 you paid in tax back? How would that work? Wealth vs. Income: There’s a fundamental difference between wealth and income. While income is a flow of money (like wages from a job), wealth is a stock of money (like the value of a house or stocks). Taxing unrealized gains is effectively a controversial and ethically fraught wealth tax. Regular CGT is bad enough. This unrealized version is even worse. Wrap Up You may say this tax is a 25% annual minimum tax on unrealized capital gains for individuals with incomes and assets exceeding $100 million. And that’s great because we should soak the rich… get them to pay their “fair share,” whatever that is. But what if they take their money and run? We need as much capital as we can get. Capital is what separates the developed from the developing. Capital is the lifeblood of advanced civilization. I’m pretty sure this tax will never get past Congress, if only because every rich person owns at least one Congressman. But still, it’s a scary concept that needs to be known… and destroyed. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( [“I traveled over 1,000 miles to show you this strange device…”]( [Click here to learn more]( He traveled 1,000 miles away from home… To show you this strange device on a farm in rural Virginia. You won’t know by looking at it, but a secret company behind this strange device could hold the potential to make you rich over the coming years. [Click here to find out how.]( [LEARN MORE]( In Case You Missed It… Why "Bad" Earnings Spark Big Rallies Greg Guenthner, Editor [Greg Guenthner] GREG GUENTHNER Good Morning Reader, We’re smack in the middle of another exciting earnings season. It’s once again that magical time of the quarter when investors become confused, angry (or both!) when stocks don’t react as they expect after filing their quarterly updates. Why are earnings so tough on armchair investors? It might have something to do with all the confusing numbers and analyst estimates floating around. Or maybe it’s because the financial media stirs the pot by quick-calling after-hours reactions, only to update their coverage when a stock abruptly changes direction following the conference call Q&A. But the most frustrating part about earnings season is that stocks don’t react appropriately once the numbers hit the wire – at least, not in the minds of most investors. More often than not, a stock will behave differently than one might logically expect, even when earnings perfectly adhere to analyst expectations. Unfortunately, there’s no quick fix that will make earnings season more palatable for the average investor. Companies will continue to dish out fresh reports every three months, and investors and traders will simply have to do their best to navigate the uncertainty. As long as you’re involved in markets, you’ll have to deal with the occasional earnings shenanigans. So it’s best if you learn to embrace the madness… Today, I’ll show you that it is possible to ride the earnings wave without losing your mind. The secret to earnings zen doesn’t involve scouring estimates, analyst reports, or insider transactions. You simply need to learn how to put the earnings announcements into context with the forces affecting a stock’s price and trend. Let’s check out a couple of recent high-profile earnings reactions that have frustrated the investing masses… A Tale of Two Mega-caps… Last week, we witnessed Tesla Inc. (TSLA) rally off 52-week lows, closing higher by more than 12% after reporting an earnings miss. The very next day, investors were forced to watch Meta Platforms Inc. (META) crater more than 15% after beating both top and bottom-line estimates. Moves like these are why so many people are distrustful of the stock market. They have no idea what to make of price action not matching up with top and bottom-line numbers parroted on the financial news. The Tesla news alone unleashed more than its fair share of angry comments across social media… Demand for EVs is falling off a cliff! Tesla’s free cash flow flipped negative! Profits are hitting 3-year lows! But none of these facts prevented Tesla shares from rocketing off their lows as traders appeared blissfully unaware that anything could be wrong with the company’s business prospects. Meanwhile, Meta has been a Wall Street darling since it bottomed in early 2023. Shares were up 450% from their 2022 lows ahead of its earnings announcement last week. The stock was also up 40% year-to-date ahead of earnings — the opposite action we had seen from Tesla during the first quarter. While Tesla’s financials were a mess, Meta actually posted some impressive numbers. The company beat earnings and revenue expectations for the quarter, extending its fiscal comeback from the dark days of its metaverse pivot in late 2021 - early 2022. But slightly lower second-quarter expectations stuck out to investors despite the strong Q1 showing. After a perfect start to the year, sellers came out in full force and sent the stock lower by double-digits to its worst showing in 18 months. What Did You Expect? To truly understand why the market reacted as it did, we have to zoom out and place the earnings into the context of the bigger price trends shaping these two popular stocks. On one hand, we have sputtering TSLA shares that have already coughed up more than 40% year-to-date. TSLA broke from its Magnificent Seven brethren in late December and spent most of the first quarter digging itself into a deep hole. Most investors expected the worst. In fact, sentiment couldn’t have been more bearish heading into last week’s announcement. Combine that with the strong downtrend and breakdown to fresh lows, and you have a recipe for a big bounce on mediocre results. Tesla only needed a report that was slightly better than apocalyptic to spark a short covering rally. And that’s exactly what happened! The opposite was true for Meta. The stock was on a historic run, posting one of the best-looking charts amongst the mega-caps extending back to the 2022 bear market lows. This strong uptrend plus the fact that Meta shares extended to new all-time highs following its previous earnings beat left little room for error. Anything less than a “perfect” earnings report would of course entice investors to take profits — which is exactly what happened. Tesla just needed to prove the wheels weren’t falling off their cars to attract buyers, while Meta needed to dazzle analysts and investors to maintain its Heck, even if this premarket drop holds, META shares won’t completely fill the earnings gap higher from early February (the stock jumped 20%-plus following its last quarterly earnings release). Bottom line: earnings reactions are all about expectations — just not the expectations everyone talks about. You have to separate the financials from how the herd feels about a stock. The best way to do that is to analyze prices and trends. Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Sean Ring] [Sean Ring, CAIA, FRM and CMT]( is a former banker and financial educator and is the editor of the Rude Awakening. Sean has trained interns and graduates from Goldman Sachs, Morgan Stanley, Citi, Bank of America, Standard Chartered Bank, DBS (Singapore), the Abu Dhabi Investment Authority (ADIA), Bank Indonesia (the central bank), HSBC, Barclays, RBS, and BlackRock. He knows the global economy is being corrupted by forces that most people can't understand and has used his unique and worldly experiences to help people navigate the markets. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. 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