‘Accounting nightmare’
Katz expressed concerns about the practical challenges of implementing a tax on unrealized capital gains, highlighting its complexity in execution and calculation.
He used a hypothetical scenario to illustrate his point: “If you have an ultra high net worth person who bought, say, $100 million worth of Amazon, and it goes to $150 million, and they tax 23% on that $50 million in year one, if in year two, that $150 — because Amazon drops — goes back to $100 million, is the government going to rebate the tax from the previous year?”
This question underscores the difficulties associated with taxing assets in a highly volatile market where values can fluctuate dramatically. For stocks, it’s not uncommon to see substantial gains in one year — often referred to as "paper gains" — that may vanish the following year. The notion of being taxed on gains that have not been realized as cash can be particularly troubling, especially when those gains are no longer present.
Katz anticipated unfavorable consequences for the proposal: “It would be an accounting nightmare, not to mention the fact it would suck money out of the capital markets,” he stated.
Furthermore, Katz criticized the tax's applicability to other asset classes, such as real estate, where investors also accumulate unrealized gains. He questioned the practicality of the policy, asking, “Are real estate owners going to liquidate real estate to pay for taxes? It makes no sense whatsoever.”
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Who should be worried?
In the "Reasons for Change" section of the Treasury Department's explanations of the revenue proposal, it is noted, “Preferential treatment for unrealized gains disproportionately benefits high-wealth taxpayers and provides many high-wealth taxpayers with a lower effective tax rate than many low- and middle income taxpayers.”
This raises an important question: Will the proposed tax affect the average American?
The proposal clearly states that it will apply to “taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) greater than $100 million.”
Only a very small segment of the population falls into this category. According to a 2023 report from Henley & Partners, there are approximately 10,660 Americans worth $100 million or more, constituting about 0.003% of the U.S. population.
Therefore, the tax will not directly affect the vast majority of people in America. However, given the substantial amount of capital controlled by those to whom the tax would apply, there could be indirect effects on the markets.
Still, Katz remains skeptical about who will ultimately be affected by the tax, reflecting on a discussion with publishing magnate Steve Forbes. “Now, granted, they're talking about this for only those that have over $100 million net worth, but as I was talking about with Steve Forbes offset, they start with that, but then it infiltrates other parts of the tax system,” Katz explained.
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