No. of Recommendations: 3
Which means it is a legitimate policy point to note that the tax code treatment of those earnings doesn't result in an especially fair outcome. - albaby
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Isn't it more of a timing thing, than a fairness thing? Consider two neighbors in a nice subdivision living the same basic life style, nice house, couple of kids, a nice vacation every year, maybe a boat in the driveway. Good solid middle class people and lifestyle. Both earn a good living and pay the associated taxes. Their life style is supported by earned (W-2) income only. Nothing unfair from a taxation standpoint so far.
The two neighbors continue their more or less equivalent lifestyle over the years, but one very savvy neighbor, sold his boat and began periodically buying a few shares of Apple, Nvidia, etc. By the time both neighbors reach age 50, the savvy neighbor has a brokerage account containing $1,000,000 of unrealized appreciation.
Has the savvy neighbor benefited in some unfair way? So far, that unrealized appreciation has not benefited the savvy neighbor in any tangible way. If you compare the two neighbors, their life style and taxation are more or less equivalent. But for sake of this discussion, one key difference is that if you look in Mr. Savvy's desk drawer there is brokerage statement with some numbers on it.
When Mr. Savvy decides to sell some stock and buy an even bigger boat than the one he sold years ago, then there will realized gains that will be taxed at that time as it should be.
My point is unrealized gains are in the abstract and will remain so until accessed for some other purpose. That is when current tax code collects the taxes due and that seems fair to me. If there is any unfairness, it would be forcing Mr. Savvy to pay taxes now in real dollars today for abstract future gains that may or may not be realized. Until that boat is in his Driveway. Mr Savvy should not be taxed on the potential of him buying it.
