On unrealized capital gains and wealth

Wealth inequality is an increasingly severe problem in the US, as essentially all wealth being created is going to the stock market – and the owners of increasingly powerful megacorporations – instead of to workers. However, the tax code in the US only assesses capital gains upon sale, so there’s various approaches being discussed to assess unrealized capital gains, such as wealth taxes. I’m suggesting a more oblique – and in my opinion, simpler, philosophically – approach.

My approach is quite simply: when you use a share of a stock, you’re realizing its value, and should therefore pay taxes on any gains at that point based on that. This works in a surprising array of situations:

  • Receiving a dividend? If you didn’t own the share before the ex-date, you wouldn’t receive that dividend, and therefore you’ve realized the value of the share as of the day before the ex-date. (Note that this is in addition to the income realized from the dividend.)
  • Exercising the voting rights at a shareholder meeting? Again, you have to own the share as of a certain date to exercise those voting rights, so you realize the value of the share as of that date. I will note that this one’s a bit more complex in practice, as it effectively acts as a literal poll tax on, say, workers who own shares of their employers voting on their management. However, this could be worked around through various ways of means testing – allowing non-executive (or non-management if you want to draw the line there) workers to not realize gains when voting, having a minimum amount of unrealized capital gains under which voting rights do not realize gains, or tying it to income in general.
  • And, the big one: using shares as collateral for a loan? Well, if you didn’t have those shares, you wouldn’t have that collateral to hand over, and therefore you’ve realized the value. That deals neatly with the way that billionaires abuse loans to avoid having to realize gains.

Note that I’d only realize gains upon use, not losses. This is important to reduce fuckery around manipulating stock prices to minimize tax burden – the losses would remain unrealized until sale, or the value increases and they become gains. (And, the existing rules around wash sales are also important, to avoid games with selling shares at a loss and buying them back immediately.) Essentially, if you use a share and it’s worth more than the cost basis, the difference is capital gains and you pay taxes on that income, and the cost basis is reset to the new higher value.

There is also a complaint that is commonly made about wealth taxes, and that would apply to this, though, and it boils down to this: “but if you make billionaires pay taxes, they’ll be forced to sell their companies to China to pay the taxes!” I have another simple approach for that: if you realize gains in a stock, in lieu of the taxes, you can distribute shares equally to the workers of that company (likely using a similar means test to determine who is a “worker” as the test for workers being exempt from realizing capital gains when voting their shares) equal to the value of the taxes that you would have had to pay for capital gains in that company. This helps offset any concerns about billionaires being forced to sell companies off to hostile third-parties, as well as bolstering worker ownership of the means of production.


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