Vermont recently became the latest in a series of states – including New York and California – to try and fail to implement a scheme to tax unrealized gains.
There’s a compelling reason that even the most progressive states can’t generate any momentum for taxing unrealized gains: it’s pure guesswork. It involves taxing hypothetical income that doesn’t even exist for assets that haven’t been sold.
Between the IRS and individuals, an unthinkable amount of time and resources would have to be devoted to creating systems for Americans to appraise their illiquid assets and for the IRS to then verify those assessments.
If implemented, this would have significant consequences for taxpayers. As it stands, our current tax code taxes transactions, a fair and transparent method that has been in place for decades. Suddenly imposing a tax before the transaction would create a beleaguered system of evaluation.
The growth of assets, particularly real estate and farm equipment, fluctuates year-to-year – sometimes substantially. Agricultural assets, in particular, are often large in terms of acreage or value. A tax on unrealized gains could force family farms to sell off parts of their land or liquidate assets simply to pay the tax.
Americans have overwhelmingly rejected taxing unrealized gains in the past, and with good reason. What would make much more sense – and bring in more revenue – is for policymakers to focus on enforcing the current tax code. According to IRS estimates, the federal government can raise $850 billion by focusing on closing the tax gap.
The IRS has already collected well over $500 million as part of these efforts. This represents a more practical and workable strategy for ensuring that the wealthy pay what they owe. Introducing a new, complicated tax would risk disrupting all this progress.
None of this has stopped the Biden administration from continuing to promote taxing unrealized gains as one of its top priorities for 2025. But the talking points simply don’t measure up to the reality.
Taxing unrealized gains is unproven, untested and risks untold impacts on many Americans. The states looking at taxing unrealized gains should abandon this unworkable idea and instead focus on measures that strengthen and enforce the existing tax code, ensuring a fair and efficient system that truly holds the wealthy accountable.
