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Title: Taxing Unrealized Gains

Original CoS Document (slug): [[https://conventionofstates.com/taxing-unrealized-gains|taxing-unrealized-gains]]

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Created: 2024-08-20 14:01:51

Updated: 2024-11-29 03:00:00

Published: 2024-08-22 00:00:00

Converted: 2025-04-14T21:32:29.661676030


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Recently a case was heard by the Supreme Court that ruled that [[https://www.kiplinger.com/taxes/unrealized-gains-tax-upheld-by-supreme-court|unrealized gains can be taxed]] by the federal government. What does that mean?—

//In a long-awaited ruling, the United States Supreme Court affirmed the constitutionality of a mandatory repatriation tax introduced by the Tax Cuts and Jobs Act (TCJA). //

//In upholding the tax, Justice Brett Kavanaugh wrote for the majority.{{https://content.conventionofstates.com/cosaction-prod/public/content/images/88153/88153_original.png?}}//

//‘The MRT — which attributes the realized and undistributed income of an American-controlled foreign corporation to the entity’s American shareholders, and then taxes the American shareholders on their portions of that income — does not exceed Congress’s constitutional authority.’//

**What are Unrealized Gains?**

[[https://www.forbes.com/sites/andrewleahey/2024/04/30/unrealized-gain-tax-a-coming-sea-change-in-fy2025-budget-proposal/|To explain]] the unrealized income or gains:

//Let’s take a simple example of unrealized gains: a billionaire holds shares in a given electric car manufacturing company. Since acquiring, either through purchase or as compensation, the given shares, they have appreciated in value significantly—let’s say from $1 per share to $1000 per share. Since the nameless billionaire has not sold their shares, they have not realized any gain, and they owe no tax on their increased net worth. This seems just, as one can imagine, perhaps on a smaller scale, being in the shoes of said billionaire—you haven’t really made any additional money, you just have the potential to make money on a sale.//

**{{https://content.conventionofstates.com/cosaction-prod/public/content/images/88154/88154_original.png?}}Moore v. United States**

The case was [[https://www.scotusblog.com/2024/06/court-upholds-trump-era-corporate-tax-on-foreign-earnings/|brought before SCOTUS]] by Charles and Kathleen Moore who owned a stake in an agricultural equipment company in India:

//Despite not receiving dividends or income from their investment over the years, the Moores paid about $15,000 in taxes on earnings attributed to them as shareholders due to the mandatory repatriation tax (MRT). The couple later argued that the MRT was unconstitutional, contending that income must be realized to be taxable under the 16th Amendment, which grants Congress the power to impose a federal income tax. Their lawsuit challenged the TCJA's provision that levied this one-time tax on U.S. taxpayers with significant ownership in certain foreign corporations.//

Their protest seems reasonable enough, but SCOTUS pointed out that it was a narrow ruling; they determined that if the undistributed income of the **corporate entity** was not taxed, then the **shareholders** should be taxed for their portion of that income. Part of Justice Kavanaugh’s ruling stated that making a different ruling could cause chaos for the Internal Revenue Service and the U.S. tax system. (A person can judge whether that potential outcome is a legitimate reason for the ruling.)

**Applying the Ruling is Complicated**

Setting limits on the unrealized gains is not as clear-cut as you might think. If shareholders have not sold their shares, they have not realized any gains and therefore would owe no{{https://content.conventionofstates.com/cosaction-prod/public/content/images/88155/88155_original.jpg?}} taxes. If, however, they borrow against their appreciating stock, they could defer paying taxes indefinitely. 

In addition, determining the amount of the unrealized gains can be complicated. Most of these gains are earned in stocks, and most of us know that the price of stocks can vary on any given day.

And to make the situation even more complicated, it appears that there is no required payment of taxes if the asset decreases in value at the time the taxes are imposed.

Justice Thomas [[https://www.scotusblog.com/2024/06/court-upholds-trump-era-corporate-tax-on-foreign-earnings/|dissented]], joined by Justice Gorsuch:

//He argued that for purposes of the 16th Amendment, ‘income’ is only income that a taxpayer receives. And because the Moores ‘never actually received any of their investment gains,’ he contended, “those unrealized gains could not be taxed as ‘income.’’//

//Thomas was sharply critical of what he characterized as the ‘consequentialist heart’ of the majority’s opinion. Thomas agreed with Kavanaugh that the Constitution does not mandate the ‘fiscal calamity’ of requiring Congress to cut programs or increase taxes. ‘But, if Congress invites calamity by building the tax base on constitutional quicksand,’ Thomas warned, “the judicial Power afforded to this Court does not include the power to fashion an emergency escape.’//

**Convention of States Seeks Fiscal Restraint**

The problem with this legislation is not just in the law itself but in the issue that it ignores. A lack of government income from taxes is not the primary problem; government overspending is at the root of the financial state of our country.

As we write about our debt in the trillions of dollars, with no end in sight for spending, taxes will only increase.

Most of us know that to be fiscally responsible, we need to live within a budget. Our country hasn’t established or tried to honor a budget in years. And without term limits, we find it harder than ever to replace irresponsible legislators who want to keep spending.

Let’s bring a halt to our out-of-control expenditures by calling a Convention of States and let legislators know that we are putting them on notice that we can’t tax our way out of debt.

 

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