Democrats want to impose a new tax on America’s wealthiest by taxing unrealized capital gains similar to other types of income— a major change to how those assets have been taxed historically.
Sen. Ron Wyden (D-OR), chairman of the Senate Finance Committee, introduced legislation on Wednesday requiring taxpayers with more than $1 billion in assets or more than $100 million in annual income for three consecutive years to pay taxes on unrealized capital gains.
“There are two tax codes in America,” Wyden said in a statement on Wednesday. “The first is mandatory for workers who pay taxes out of every paycheck. The second is voluntary for billionaires who defer paying taxes for years, if not indefinitely.”
The so-called “Billionaires Income Tax” would apply to around 700 taxpayers and raise “hundreds of billions of dollars,” according to the proposal, which comes as Democrats discuss ways to fund their reconciliation package over the next decade.
‘Allows wealthy people to continue building wealth over time’
Unlike other types of income like wages, investors pay tax on capital gains only when they are “realized” — meaning when the assets are sold — compared with a worker who pays taxes as they earn it.
Deferring capital gains taxes allows rich Americans to earn returns on untaxed money until the assets are sold — at which point investors can time the sale to blunt any tax burden. In the meantime, those untaxed gains can be used as collateral for loans.
“If you don't pay tax on the annual increase in value of your assets, you continue earning returns on money that you would otherwise pay in tax,” Samantha Jacoby, senior tax legal analyst at the Center on Budget and Policy Priorities, previously told Yahoo Money. "It's an important tax advantage that allows wealthy people to continue building wealth over time."
The deferral option mostly benefits those at the top of the income distribution. For the top 1%, capital income — which largely is taxed at lower rates than income — accounted for 41% of their income in 2016, according to data from the Congressional Budget Office. The bottom 80% derive less than 3% of their income from capital income.
‘Ensure billionaires pay tax every year’
For tradable assets like stocks, those above the income thresholds would have to pay an annual tax on the gain in the value of the asset they hold starting in 2022 using the mark-to-market method. Unrealized losses could be carried back to offset gains for up to three years. All gains and losses would be treated as a long-term capital gain or loss.
Non-tradable assets like real estate or a business interest — which are harder to value — would not be taxed each year.
Instead, they would be subject to capital gains when sold or transferred but would be subject to “deferral recapture amount,” according to the proposal. The additional interest charge would approximate how much tax would have been owed on the gain of the asset each year. The total tax paid after the sale of an asset, including the interest, may not exceed 49%.
Wyden’s proposal also targets loopholes that allow tax evasion, including gifts and bequests as well as limiting the use of deferred compensation, annuities, among others.
“The Billionaires Income Tax would ensure billionaires pay tax every year, just like working Americans,” Wyden said. “We have a historic opportunity with the Billionaires Income Tax to restore fairness to our tax code, and fund critical investments in American families.”