Among the worst ideas in the Biden administration’s proposed budget is a new annual tax of at least 25% on unrealized gains for Americans with incomes and assets of over $100 million.
Taxing unrealized gains is an entirely new prospect that, if the Biden administration succeeds in doing it, would penalize individuals for owning assets that appreciate, regardless of whether those assets are sold.
But there the proposed tax is anyway in President Joe Biden’s 188-page Fiscal Year 2025 U.S. Government Budget and accompanying 256-page General Explanations of the Administration’s FY 2025 Revenue Proposals.
Such taxes are rare due to complexities in valuing these assets, liquidity concerns, and overall implementation challenges and risks. When implemented, such taxes lead to an exodus of taxpayers.
For example, when Norway initiated a similar tax in fall 2022, over 30 Norwegian multimillionaires and billionaires left the country, moving to Switzerland. This number eclipsed the total number of multimillionaires and billionaires who abandoned Norway in the prior 13 years.
Entrepreneurship is the engine of the U.S. economy, and the proposed tax on unrealized gains would act as a kill switch on several fronts.
First, America’s wealthiest fund a significant share of high-risk, high-variance investments in early-stage, startup, and small-cap companies. The proposed tax would require that with every high variation, the investor must pay a tax on it. So the highs get higher and the lows stay lower.
Thus, investors may be less likely to invest in growth-oriented ventures due to greater swings in valuation compared to larger, established companies.
As an example, imagine being worth about $100 million and investing $1 million in a promising new biotech startup.
BioNTech, a biotechnology immunotherapy company, began publicly trading at $13.82 ($1 million = 72,368.9 shares) and reached a high of $389.01 and a year-end price of $257.80.
In this scenario, the investor would have owed taxes to the federal government on the $243.98-a-share gain ($17,656,564.22) at 25%, or $4,414,141.05 in taxes, even without selling any shares.
Now fast-forward to today, when BioNTech’s stock price is trending down and now trading around $100. There is no tax on unrealized losses.
Moreover, investors now will think far more about the time component of the equation and the expected future behavior and valuation of an exit. The new tax on unrealized gains could hasten the selling of assets by investors for tax reasons rather than legitimate business reasons.
This tax also would hurt entrepreneurs who typically hold a large share of stock in their ventures. When successful, that share would increase substantially in value. Even if the entrepreneur doesn’t sell any stock in his or her successful company, he would owe taxes on the increase in value.
An example here would be Fanatics, the Jacksonville-based online sports memorabilia and merchandise retailer. As of December’s latest investment round, Fanatics is valued at $31 billion.
Under the Biden proposal, Fanatics founder and CEO Michael Rubin would owe substantial taxes on the unrealized gains over this appreciation.
Taken together, these pressures would result in less capital for entrepreneurs, significantly lowering investment in entrepreneurship. This in turn would result in lower rates of innovation and productivity—a kill switch for entrepreneurship.
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