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What are unrealized capital gains? Who pay taxes for it?

Nancy Pelosi has told CNN that the Democrats are planning a new annual tax on billionaires in order to fund their spending plans - how will it work?

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What are unrealized capital gains? Who pay taxes for it?
Michael M. Santiago AFP

With negotiations surrounding President Biden's spending plans said to be drawing to a successful conclusion, the disparate Democrat groups must now find a way to pay for it. The president has ruled out increasing taxes for ordinary Americans, going so far as to call the Child Tax Credit one of America's great middle-class tax cuts, so the burden must fall on the super rich Americans who have made a killing throughout the pandemic.

To put this into context, Elon Musk made $25 billion in one day, Monday 26 October. Millions of Americans, and people all around the world for that matter, are being devastated by the economic fallout of the pandemic, with record numbers of Americans applying for unemployment grants or benefitting from the various rounds of government support since March 2020.

One way to increase tax on the super rich is taxing unrealized capital gains, but what are these and who will be affected?

So what are they?

Gains or losses are said to be realized when an owned investment is sold. An unrealized loss occurs when a stock decreases after an investor buys it, but has yet to sell it. If a large loss remains unrealized, the investor will be hoping the stock's fortunes better and the stock's worth will increase past the price at which it was purchased. If the stock rises above the original purchase price, then the investor would have an unrealized gain for the time they hold onto the stock.

That is usually a time an investor would sell.

Why are unrealized capital gains relevant?

Tax can only be levied on investments once the investment has been sold, but if the rules were to change, then investors would need to declare to the IRS where their money is invested and how much is invested. Taxes would then be levied on most investments while they are still an investment "on paper" rather than when they are sold, which can be deferred until a preferable time.

While the Democrats have not said this is a definite plan, is said to be in a "menu of options" for how to fund the president's wide-ranging social spending plans.

“I support a lot of these proposals. We don’t need all the things I support to pay for this -- but I do support that,” Biden told reporters at the White House Friday when asked about the billionaire tax. “I just think it’s about just paying your fair share, for Lord’s sake.”

There is little doubt that workarounds will be found by the super-rich, but impacting how people complete investments is an interesting tactic.

Who will pay for them?

President Biden has stressed that the full budget will be paid for by raises taxes on America's richest, supposedly those who earn more than $100 million a year. The Democrats have stressed that taxes will not be increased on middle- and working-class Americans.