Bitcoin HODLers live by the lyrics of Rick Astley’s 1987 hit song, “Never Gonna Give You Up”. Many have held onto their stack for years, through steep price drops, only to see the price soar to new highs each year. Unlike short term trading, this is a buy and hold investment strategy that seems to work.
Janet Yellen doesn’t care.
Treasury Secretary Janet Yellen announced on October 23 that a proposed tax on unrealized capital gains – yes, gains from investments that haven’t even been sold yet – could help fund President Biden’s now reduced $ 1.75 trillion social spending bill. Senate Finance Committee Chairman Ron Wyden proposed the idea that this would be a historic change in the way American citizens are taxed.
If Yellen and the US Congress are successful, wealthy investors could be taxed on those unrealized gains, the appreciation in the price of their assets. The tax would apply to all âproperty,â which includes stocks, real estate, gold, and even cryptocurrencies like bitcoin. Cryptocurrency is not viewed by the IRS as currency, but rather as property. Whenever you sell or spend cryptocurrency, you are making a taxable transaction that results in either a capital gain or a capital loss.
The effort would be an attempt to lower taxes for America’s richest families, by assessing a tax on assets that have appreciated but have not yet been sold. Wyden’s plan would be
apply to those with over $ 1 billion in assets or those with income over $ 100 million for three consecutive years. Income is easily verified from tax returns, but assets, well, it gets a little trickier. Some assets are publicly valued, but many are not.
Some members of Congress are apparently not thrilled that some wealthy people can receive little or no current income, pay no taxes and yet see their wealth grow exponentially over time. Currently, the uber-rich can own appreciating assets, not sell any, but finance their way of life by borrowing from their vast holdings. This makes perfect sense since we are in an extended period of interest rates close to zero percent. Not surprisingly, Congress is not happy with this.
It should be noted that the latent gains tax plan is not the same as a âwealth taxâ of the type proposed by Senator Elizabeth Warren. A wealth tax would be levied on the value of all assets, not just those that have appreciated. The two taxes are similar, but certainly different. House Speaker Nancy Pelosi, herself one of the richest investors in Congress, said last Sunday: “We will probably have a wealth tax,” showing that she does not understand the difference.
How complex could this tax be?
As a trained chartered accountant, I think I can foresee many complications that could result from the imposition of a tax on unrealized capital gains.
1. Assessments. Every asset owned by these rich people should be valued, every year. Evaluating a closed business is both an expensive and time consuming process. There is no way that these assessments can be done in a timely manner every year to be included in a tax return. (Think of someone like former President Donald Trump, who owns interests in more than 500 closed companies.)
2. Subjectivity. Not all assets are easy to value. Of course, everyone knows how much Jeff Bezos’ stock on Amazon appreciates each year, and ditto with Elon Musk. Bitcoin holdings are also easy to value. These assets are all listed on the stock exchange. It is a handy fruit for this kind of tax. But, as with the private businesses mentioned above, it is also not easy to value assets such as works of art, wine collections, yachts and airplanes. Who can say what a work by Picasso is worth this year? Lots of subjectivity involved, that’s for sure. Real estate is also difficult to value and subject to many factors.
3. Reports. How would the declaration of the value of these assets be carried out? Brokerages would be required to publish forms detailing the fair market value of all assets at the end of each year, which would undoubtedly result in some setback. Should other custodians also make a declaration? Cryptocurrency exchanges, for example? Keep in mind that many US citizens buy their cryptocurrency on foreign exchanges, which would not be subject to any regulation by the US Treasury. Not to mention the millions of holders who keep their bitcoin themselves! The IRS might not be aware of this.
4. Liquidity. Taxpayers like Jeff Bezos and Elon Musk have almost all of their net worth in the stocks of the companies they run. Paying an annual tax on the value of these shares, each year, would undoubtedly require selling some of the holdings. Asset markets may have to go through an annual liquidation period in order to generate liquidity for the new tax. The IRS currently only accepts US dollars for tax payments. They will also not accept bitcoin or other cryptocurrencies. Thus, the tax would also encourage the sale of digital assets.
Where would it all go? Checks: it would lead to long, drawn-out and complicated tax audits, with protracted litigation, appeals and settlements. The rich can hire the best tax lawyers available, and this process would go on for years without resolution. Congress may be relying on tax revenue to flow smoothly into government coffers, but there’s no way it’s going that way.
Here is another question surrounding such a tax. Would have unrealized losses count in favor of the taxpayer? Would these declining assets be deducted from appreciating ones, thus taxing the overall net increase in wealth? It is not yet clear.
Could the declines in value be carried over to the increases, thus generating huge tax refunds in the years to come? The bitcoin bear market of 2018 comes to mind, when the price of a bitcoin fell from over $ 19,000 to around $ 3,300, an 80% drop in value. (Also think of the stock market crash years, 2008-2009.) No doubt the Treasury will not want to cut reimbursement checks for the rich. These are extremely complicated questions that have apparently not been clearly thought through.
Another major issue involving a tax proposal on unrealized capital gains would be enforcement. The Internal Revenue Service cannot even answer phone calls from taxpayers or tax professionals at this time. They cannot respond to correspondence within one year. Where would all these enforcement agents come from? Not to mention that all businesses in the country are facing a labor shortage.
The constitutionality test
The 16th Amendment to the United States Constitution authorizes the taxation of “income”, and this formulation has given rise to a long history of court cases involving various forms of taxation. Case law has established that something defined as income has to do with the fact that the person has complete control over the source of the money and can use it as they see fit. It doesn’t really correspond to the unrealized gains situation. Indeed, even to pay this tax, liquidity from the investment would be necessary.
The text of the amendment, taken literally, would appear to allow only taxes on income, and certainly not on wealth. Whether it is a increase in wealth, on paper, represents income, will be a question for the courts.
Does it stop at billionaires? What about state taxes?
The Income Act of 1913 imposed an income tax on persons with income over $ 3,000. Adjusted for inflation, this works out to about $ 75,000 in today’s dollars. The tax affected about 3% of US citizens. Obviously, income tax went up and up until it hit over 50% of citizens, and social security and health insurance taxes were added, so that roughly
every worker pays taxes. And this is the fear with either a wealth tax or a tax on unrealized capital gains. How quickly would this tax decrease to affect more and more taxpayers?
Taxing a few hundred billionaires is one step, but like income tax, the real money belongs to the general public. Tax increases on the rich can pay little.
Here’s a scary thought: Could this tax ever be applied to the value of property? retirement accounts? Currently, it’s not on the table in Congress, but some members have expressed outrage at the huge sums some wealthy people have amassed in the IRA accounts.
Scary thought number two: Will States follow suit? Oh my God, would New York and California be next on the list for a slice of this pie? It could happen.
What about corporations?
So far, there has been no question of applying this tax to corporate assets. On the contrary, a proposal is circulating that would impose a minimum tax of 15% on all companies, because the old alternative minimum tax was repealed in 2017.
A tax on unrealized capital gains on corporate assets might particularly hit those who own real estate, but companies with bitcoin also come to mind. Michael Saylor’s state-owned company MicroStrategy is currently sitting on unrealized gains of over $ 2 billion on its bitcoin stack. The same goes for Tesla and Square, and many others.
If this tax on unrealized capital gains was not applied to corporations, then I can see bitcoin whales putting their stack in a corporation, with the help of some nifty tax attorneys.
Chances of passing?
At this point, there is no indication of the chances of this tax being passed by Congress. With Democrats holding small majorities in the House and Senate, it seems very possible. And, with the expense bill already reduced from its original price of $ 3.5 trillion, the odds look better. Votes in the House and Senate are expected before Thanksgiving.
One thing is certain: when a tax is imposed, those affected will do everything in their power to circumvent it.
Leonard Burman, co-founder of the Tax Policy Center, said:
âIf you have a threshold, you really get people to reorganize their businesses to keep their income and wealth below the threshold. “
This is a guest article by Rick Mulvey. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.