The Truth About Taxing Unrealized Gains

The U.S. tax code is complex, but within its intricacies lie opportunities that the wealthy often leverage to grow and preserve their wealth. One of the most effective strategies is commonly referred to as "Buy, Borrow, Die." This approach allows individuals to minimize taxes, maximize the value of their investments, and transfer wealth to future generations in the most tax-efficient way possible. Let’s use Jeff Bezos as an example.

Jeff Bezos accumulates $100 million worth of Amazon stock, and he wants to buy a spaceship. If he sells the stock, he will owe millions of dollars in capital gains. If he instead borrows the money, using the stock as collateral for the loan, it is not a taxable event.  He also gets to retain ownership of the stock, allowing for more potential appreciation. When he passes away, his heirs receive a “step-up” in basis. This means that the IRS treats the inherited stock as if it were purchased on the date of Mr. Bezos’ death, meaning they would owe little-to-no tax on a subsequent sale*.     

*The assets would still be subject to the estate tax, which currently has a $13.61 million lifetime exemption

BUY – accumulate a taxable asset that would be subject to capital gains on a sale

BORROW – use the asset as collateral for a loan to fund your lifestyle while retaining ownership of the asset

DIE – pass the assets onto your heirs, potentially tax-free 

Taxing unrealized gains means taxing something before it is sold. Kamala Harris’s proposal to tax unrealized gains is designed to target the “Buy, Borrow, Die” users and not individual investors. It should be noted, it is the same plan that President Biden proposed that was subsequently rejected. A deeply divided congress makes large, sweeping changes very difficult to get approved. 

In its current form, the proposal targets households with incomes and assets exceeding: $100 million dollars.  Most people are not included in the $100 million group, me included. And if you argue that it is a slippery slope that would eventually result in all households having tax on unrealized gains, I disagree. The logistical nightmare that this would cause, just targeting a small segment of the population, would be insane and unsustainable. There is no way it trickles down to everyone. Just trust me on this one.

What is concerning is her intent to let the 2016 Tax Cuts and Jobs Act (TCJA) expire, which will potentially increase taxes for everyone. Some of the TCJA benefits that could be eliminated:

• Lowered Income tax rates (for example, the 28% bracket became the 24% bracket) with the lowest bracket being 10% 
• The standard deduction doubled to $14,600 for single filers and $29,200 for married couples filing jointly
• The Estate tax exemption increased (currently $13.61 million) and was indexed for inflation
• The Alternative Minimum Tax (AMT) exemption amount was raised and included a phase-out threshold

These parts of Harris’s plan are the ones that should be concerning because they have the potential to affect everyone, not just the wealthy. So, when election season comes around, make sure your voice is heard. A single vote may seem small, but collectively, our votes determine the future of our economy, our communities, and our financial well-being. Take your vote seriously—it’s your chance to shape the policies that impact us all.

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