Disregard social media. This is what Harris’ unrealized capital gains tax proposal means for you.

One of the most odd places for a contentious policy debate to take place is on social media, where a tax proposal that is intended to target the wealthy and that has been endorsed by Vice President Kamala Harris is receiving attention.

Most of the posts, however, fail to take into account the fact that the plan would only have an effect on those whose net worth is greater than one hundred million dollars, which is less than one percent of taxpayers. Instead, they wrongly claim that all homeowners should be concerned about a new big tax payment. According to the assertions of one user on TikTok, for instance, individuals will “lose their homes” and “the IRS will bankrupt them.”

The topic at hand is a proposition that is frequently referred to as a minimum tax on billionaires. Regardless of whether or not the assets are sold, the increase in value of assets such as real estate, stocks, and private businesses would be considered taxable income each year. Unrealized capital gain is the term used to describe this situation.

A tax on a gain or profit that only exists on paper is one way to think about it. This is one method to analyze it.

Mark Friedlich, vice president of government affairs at Wolters Kluwer Tax & Accounting, referred to the plan as “quite a transformational” in his statement.

While Harris was campaigning, she stated that she is in favor of a minimum tax on billionaires. While she has not provided a detailed explanation of the particulars, the most recent budget proposal that the Biden-Harris administration has submitted includes the specifics.

Among the many plans that Democrats have put forward in recent years to tax the wealthy, one of them is a minimum tax on billionaires. It has been stated repeatedly by both President Joe Biden and Senator Harris that they want to ensure that the wealthiest Americans pay their “fair share” of taxes. They have also stated that the additional tax revenue that is collected could be utilized to finance social spending programs such as providing assistance to families in the form of child care or assistance with down payments for first-time homebuyers.

When an item, such as a stock or a property, is sold for a price that is higher than what the owner initially paid for it, the owner is subject to a tax known as realized capital gains. People with middle-incomes and high-incomes are currently subject to this tax. Fundamentally, it is a tax on the profit that is made. The top tax rate on millionaires who have long-term realized capital gains has been specifically called for to be raised from 20% to 28%, according to Harris’s precise call.

Here are some important factors to keep in mind regarding the potential operation of these tax changes:

The majority of taxpayers would not be affected by this.

A billionaire minimum tax on unrealized capital gains would be imposed on taxpayers whose net worth is greater than one hundred million dollars, as suggested by the most current budget proposal put forth by the administration of Vice President Joe Biden and Lieutenant Governor Harris.

According to the most recent data published by the Internal Revenue Service (IRS), just 20,209 taxpayers, or approximately 0.01%, had a net worth that was estimated at $50 million or more in 2019. This helps to put this into perspective.

Altrata, a private company, has provided their most recent data, which indicates that the number of persons with high net worth has increased over the course of the past five years. However, it is likely that a relatively small percentage of all taxpayers in the United States earn more than one hundred million dollars.

Taxpayers with incomes greater than one million dollars would be subject to Harris’s proposal to raise the tax rate on realized capital gains to 28 percent. According to the Internal Revenue Service, approximately 875,500 taxpayers, which is equivalent to 0.54%, reported having that amount of income in 2021.

Erica York, a senior economist and research director at the Tax Foundation, which tilts to the right, stated that those who would be affected are “the smallest slice of the very wealthy.”

How a tax on financial gains that have not yet been realized would operate

On a fundamental level, a billionaire minimum tax is a tax on unrealized capital gains. Let’s talk about how a homeowner might be affected by such a tax.

According to the current tax system, a homeowner is required to pay a tax on the increase in the value of their home when it is sold or realized. A homeowner would be required to pay a tax on the appreciated worth of their property each year if there was a tax on unrealized capital gains. This would be the case even if the home had not been sold at the time of the declaration.

Consider the following scenario: a home was purchased for $500,000, and the following year, its worth increased to $520,000. The owner would be responsible for paying some tax on the $20,000 rise in value.

Different types of assets, such as stocks and private firms, would also be subject to the tax. On the other hand, the proposal put forth by the Biden-Harris administration would only have an effect on individuals whose net worth is greater than one hundred mil.

One such misunderstanding is the amount of money that rich taxpayers would be required to pay. It would not be a new tax bill that needs to be paid separately.

On all of their income, including unrealized capital gains, taxpayers who are affected by the proposal put forth by the Biden-Harris administration would be required to pay a minimum effective tax rate of 25%. For this recalculated income figure, they would be required to pay more taxes if the effective tax rate went below 25%.

It would be a hassle for the Internal Revenue Service to impose a tax on unrealized gains.

In order for the Internal Revenue Service (IRS) to be able to implement a tax on unrealized gains, it is likely that they would need to devise a method to measure the annual change in value of personal property and private businesses. At the moment, the organization does not actively monitor these values.

“As if the Internal Revenue Service is not already facing enough challenges, this creates an enormous administrative burden for the agency,” Friedlich added.

There is a possibility that the agency will be unable to fulfill its primary responsibilities, which include the prompt processing of refunds and the provision of assistance to customers.

There may be ways to reduce the burden that the Internal Revenue Service (IRS) is under, but this will rely on the specifics of the proposal. One example is a plan that would not have taxed non-tradable assets such as real estate or enterprises on an annual basis. This proposal was made by Ron Wyden, a Democrat from Oregon and the chairman of the Senate Finance Committee.

In the House of Representatives, the new tax is a long shot.

It may be difficult to garner the votes necessary to enact the billionaire minimum tax or the rise to the long-term capital gains tax rate through Congress, even if Democrats still control both the House and the Senate under a future presidency of Harris.

Similar tax ideas were prevented from getting forward in 2021 by Senators Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, both of whom had formerly been Democrats but had since transitioned to the independent party.

An unprecedented tax on money that has not yet been received, a billionaire minimum tax, would almost certainly be met with a great deal of opposition from the legal community if it were to be passed.

It has been stated by some individuals who are opposed to the wealth tax plans put forth by the Democrats that people cannot have faith that these measures will not eventually be extended to households that fall into the middle class.

If the past is any indicator, there are examples that demonstrate that the government has been known to both increase and decrease the amount of taxes that it imposes after initially establishing them. For instance, the federal income tax has been extended to a greater number of individuals throughout the course of time. On the other side, the results of the estate tax have become less significant.

There is no indication that Harris intends to raise taxes on individuals who make less than $400,000 annually, which is in line with the policies that Biden has implemented.

Moreover, inheritances might be affected by a different tax proposal.

There is a provision in Biden’s budget that would alter the manner in which inherited assets are taxed, but Harris has not directly alluded to this matter.

Because of a clause known as “step-up in basis,” you are exempt from paying a capital gains tax at the present time if you inherit a place of residence, stocks, or a business that has improved in value.

Under the Biden proposal, however, certain wealthy individuals would be required to pay that tax in the event that an appreciated asset is passed on after the individual’s death. The increase in basis is said to disproportionately benefit the wealthy, whose wealth is typically invested in real estate and stocks, according to the argument. It is currently possible for certain riches to be passed down from one member of a family to another without ever being subject to taxation through this process.

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Any inheritances with an appreciated value of more than $5 million for individuals or more than $10 million for married couples would be exempt from the adjustment that Biden is proposing being implemented. In addition, assets that are given to charitable organizations would not be subject to taxation.