The Harris Tax “Plan" Devil Is In The Details
By Brent E. Zepke, Esq.
On Taxing Unrealized Gains
A center piece of Kamala Harris’s campaign platform is her promise to create a tax on Unrealized Gains of 25%.
Harris and her team, failing to provide any details on this, or any other part of her platform, recalls the words of the German-American architect Ludwig Mies van der Rohe (1886-1969), whose words have become universal and undying: “The devil is in the details.” Those words were his way of warning that there are always hidden or mysterious elements in the details of any bill or agreement.
Jennifer Paige, in the lyrics to her song “The devil’s in the details,” wrote it this way:
“Don’t lie to me, shy away
Take another minute
Get the story straight”
It is time to take another minute to get the story straight by exploring some of the hidden elements of Harris’s proposed new tax of 25% on unrealized gains that, presumably, is on assets.
Assets
A property owned by a person or company that is regarded as having value, can include:
stocks and bonds traded publicly and privately
real property in land and buildings
other forms of property, such as jewelry and art.
Does this include your home?
Maybe.
Your home, being an asset, appreciation is an unrealized gain subject to the Harris tax.
Unless, of course, there is a specific exclusion in the application of the tax, which exemplifies that the devil is in the details which, naturally, are not now available.
The result is that if you vote for Harris without her providing any details on this tax, or the rest of her campaign platform, you will be following the 16th century expression for merchants selling piglets in sacks, or pokes, without knowing what was inside, of “Buying a pig in a poke.”
Also, in the “poke” are vacation homes, rental properties, art, jewelry, and whatever else you hold as an asset. The owners of apartment buildings will pass the amount of taxes on to the renters.
Tax On the Middle Class
Harris’s statement alleging that she does not want to increase taxes on the middle class is a victim to the devil in the details, since her tax of 25% on unrealized gains is applicable to the middle class as well as billionaires.
The Hercules Example
Hercules, Inc., awarded each employee stock options, which are only exercisable when the stock increases to some designated number called the ”strike price.”
Employees in the Scandinavia countries tried to not accept the options. Why?
Because in Scandinavia they tax unrealized gains, so the employees immediately owed the taxes on the strike price even though the stock’s price had not yet reached the strike price, and never did.
The same thing can happen under the Harris tax plan for unrealized gains.
A Numerical Example
Let’s consider you purchasing an asset, be it a stock, home, or some other asset, for $100,000. If the market value increases to $300,000, you will have $200,000 of unrealized gains.
Since once you sell the asset, any gains will be realized, the only way the Harris tax can be implemented is to charge it every year.
What would the effect be of applying Ms. Harris’s 25% flat tax per year be on your total return?
For simplicity, we will not consider transactional fees, such as brokers’ commissions or realtors fees, or other taxes, such as property taxes.
In our example, the purchase price remains constant at $100,000, as does the market value of $300,000, the unrealized gains of $200,000, causing the tax on unrealized gains of 25% of $200,000, or $40,000, every year.
The total returns each year is determined by subtracting from the market price the total of the purchase price and the cumulative taxes paid on the unrealized gains.
Total return for year 1: $300,000-$100,000 = $200,000, minus the 25% tax on the $200,000, or $40,000, that must be paid in cash, making the total return $160,000.
Year 2, 3, 4, and 5: $40,000 tax on the unrealized gain of $200,000 each year subtracted from the total return at the end of the previous year, makes the total return for year 2 as $120,000; year 3 as $80,000; year for as $40,000; year 5 as zero.
Much like Bernard Slate’s play “The Same Time Next Year,” the same time every year there is a tax on your unrealized gains of $40,000 per year.
If the market value of your asset increases, so will your taxes. If the value drops, so will your future taxes on unrealized gains: but as in the Hercules example, a future drop in value will not lead to a refund of taxes paid.
Alternate Forms of Investments
Calculating the unrealized gains for assets requires determining the market value each year, which is sometimes referred to as “mark-to-market,” which is typically done by using a sale of comparable assets, such as stocks or bonds.
When there are no comparable sales, such as for privately traded stocks and “one-of- kind” investments, such as art, or perhaps your home, an estimate of the market value must be used. Since the estimate, whether done by the owner, an expert, or an appraiser, must always contain assumptions, they can vary significantly.
Perhaps anticipating problems with the new tax, the Biden-Harris team obtained the funding to hire 80,000 more IRS agents, roughly doubling the size of the IRS, that can be employed to challenge the assumptions.
What happens when you sell your asset?
Selling An Asset
Currently, you will owe a tax on the realized gain although there are too many details to discuss herein.
Conclusion
The devil is in the details of the Harris plan for taxing unrealized gains at 25%, as it is for most of her campaign promises, so voting for her would be voting for a pig in a poke.
Why would anyone do that?
Have you reserved tonight’s Vice Presidential Debate Watch Party tickets yet?
Santa Barbara Current (www.SBCurrent.com) is organizing a Vance / Walz Presidential Debate Party at Anchor Rose Bar at the Santa Barbara Marina from 5 pm to 8:30 pm, on October 1st. We would very much like for you to join us.
You’ll enjoy a Cash Bar, the Anchor Rose Bar Menu - including their Happy Hour Menu up until 6 pm - Mutual Respect, and, most of all, Friendship (and maybe even some Laughter). Arrive early (doors open at 4:45pm) to get a good seat.
Door charge tickets will be $15/in advance or $30/at the door (if available). Only 60 tickets will be sold so please order in advance.
Note: Door Charge Tickets are for entry only, food and drink purchases are not included. More information and tickets here.
Every Democratic Voter has been asleep, brainwashed. They are like children believing the rhetoric of free pizza and no homework.
But worse yet is the Republican Voters are all in hiding. They are as much to blame. Too lazy to fill out the ballot sitting on their kitchen counter. Too wrapped up in themselves and their pity party to donate $20 to a local candidate who is brave enough to run against the demonic machine.
Republicans handed over the country because of laziness.
Democrats are just blind and uneducated not holding their representatives accountable for blowing up the budget, putting SB into millions of debt, not caring about children’s education, not caring about stores and local businesses, not caring about the humanitarian crisis of homelessness. But they will march & donate to Ukraine and Pro Terrorist countries defending the terrorists brutally killing, raping women & children in their own home.
God Bless us all.
Taxing unrealized capital gains will be devastating to investment markets and senior homeowners. We already have a tax on unrealized capital gains through the alternative minimum tax (AMT). In 2003 I was assessed AMT of 18% on unrealized capital gain in a privately held stock. According to the rules of AMT at the time, the revaluation of stock held in a non-publicly traded company was considered a tax preference item and subject to 18% AMT. While the AMT on unrealized capital gains only affected a small number of people, the Harris plan would extend the joy to just about every taxpayer. I believe that government has its eyes on the $7T held in 401k plans in America. It would be in harmony with the theme of taking all your money away to extend this to unrealized gains held in 401k plans.