As the 2024 election season gains momentum, the tax policies proposed by the leading candidates reveal stark contrasts in their visions for America’s economic future. A key issue in this contrast is the proposal to tax unrealized capital gains—a concept recently linked to Vice President Harris through her endorsement of President Biden’s fiscal year 2025 budget proposal.1 While the United States has never before taxed unrealized gains, this concept may be closer to reality than ever before. This article will provide a broad overview of the legal, economic, and political implications of such a tax.

The Harris-endorsed proposal seeks to impose a 25% tax on unrealized capital gains for individuals with over $100 million in assets.2 The idea is to target the wealthiest Americans, forcing them to pay taxes on gains in the value of their assets—even if those assets haven’t been sold.3 Though taxing realized gains is a common feature of the current tax system, taxing unrealized gains introduces new legal and economic challenges. The key questions are whether such a tax is constitutional and how it would impact the economy.

While the United States has not broadly taxed unrealized gains, certain forms of unrealized gains are already subject to taxation. For example, futures contracts and gains realized by securities dealers are taxed as constructively received income,4 though these cases remain exceptional and do not provide a precedent for a more general tax on unrealized gains.

The constitutionality of taxing unrealized gains remains undecided. Under the U.S. Constitution’s Sixteenth Amendment, Congress has the power to tax income without apportioning it among the states.5 However, unrealized gains do not constitute income in the traditional sense because they have not been realized through a sale or transaction.6 This distinction is crucial in understanding the legal debate surrounding this proposal.

In Moore v. United States, the Supreme Court held that the Mandatory Repatriation Tax—part of the 2017 Tax Cuts and Jobs Act—did not violate the Constitution by taxing American shareholders on the undistributed income of foreign corporations.7 The Court’s holding was explicitly narrow and limited to: “(i) taxation of the shareholders of an entity, (ii) on the undistributed income realized by the entity, (iii) which has been attributed to the shareholders, (iv) when the entity itself has not been taxed on that income. In other words, [the Court’s] holding applies when Congress treats the entity as a pass-through.”8 The Court further emphasized, “that to realize income, one must receive something new and valuable beyond the property she already owns.”9 This raises concerns about whether taxing unrealized domestic gains could meet this requirement. The Court indicated that the realization of income is required before the government may impose a tax without apportionment10 – potentially ruling out the possibility of a tax on unrealized gains. However, Justice Kavanaugh wrote in the opinion that the Court was not addressing tax questions involving wealth or net worth.11

The potential economic effects of taxing unrealized gains are significant. One immediate consequence would be the creation of liquidity issues for asset holders.12 Since the tax would be imposed on assets that have not been sold, individuals may be forced to sell part of their assets to pay the tax, triggering a forced liquidity event. Such events could lead to price declines, particularly in illiquid assets like real estate or privately held businesses, further depressing the market value of those assets.

In addition, a tax on unrealized gains could create a cascade of forced sales. If one investor is compelled to sell assets to cover their tax bill, the next buyer might also face a similar tax on the unrealized gains they inherit, prompting further sales and driving prices down across the board.13 This could have broader implications for investment behavior, potentially discouraging long-term investments in favor of more liquid assets that can be easily sold to cover tax obligations.

Wealth inequality is another factor to consider. Proponents of taxing unrealized gains argue that it could help address the widening wealth gap in the United States by ensuring that the wealthiest individuals pay their “fair share” of taxes.14 However, critics argue that such a tax could disincentivize investment and innovation, ultimately leading to slower economic growth.15

The likelihood of such a tax being enacted depends heavily on the outcome of the 2024 elections. Democrats would likely need to control both chambers of Congress and the White House to push this proposal through. Even then, significant legal challenges are expected, given the potential constitutional hurdles.

Moreover, implementing a tax on unrealized gains would require substantial changes to the current tax code, particularly regarding how assets are valued and taxed over time. Questions remain about how the government would handle unrealized losses—would taxpayers receive a credit or rebates for declines in asset values, or would the government only tax gains?

While the proposal is framed as a way to address wealth inequality and generate additional revenue, its constitutionality remains dubious. The economic impacts, including forced liquidity events and potential market distortions, could also have far-reaching consequences. Furthermore, it seems predictable that once such a tax scheme is implemented, it will inevitably apply to those with lesser net worths.16 As the federal deficit continues to grow17, the conversation around new forms of taxation will only intensify. However, as this proposal moves closer to the realm of possibility, it becomes clear that the U.S. does not have a taxing problem—it has a spending problem.