Unrealized capital gains are emerging as a focal point of U.S. tax policy discussions. Lawmakers are considering measures that would tax the increase in value of assets—such as stocks, real estate, art, or cryptocurrency—even when the owner has not sold them. The proposals could affect a broad range of high‑net‑worth individuals, not only billionaires.
Current Proposals
- Annual or “deemed‑sale” tax – Legislators are debating whether to require taxpayers to calculate the fair‑market value of all assets each December 31 and pay tax on the appreciation, or to impose a one‑time “deemed sale” on a specific date.
- Elimination of the stepped‑up basis at death – A draft discussion paper released by Senator Chris Van Hollen (MD) and six other senators would reduce the current unlimited exemption to a $1 million threshold. Under the existing rule, heirs inherit assets at the market value on the date of death, avoiding capital‑gains tax on prior appreciation. The proposed change would treat the inherited gain as taxable income for the heirs.
- Higher capital‑gains rates – The Biden administration has signaled support for raising the top capital‑gains rate to as much as 50 %, potentially making the United States one of the highest‑tax jurisdictions for investment income.
These initiatives are framed as a way to fund President Biden’s infrastructure and social‑program spending, but they also reflect broader concerns about wealth concentration and the perceived “unfair advantage” that stepped‑up basis provides to wealthy heirs.
Precedents and Related Rules
- Covered expatriate rules – When a U.S. citizen meets certain net‑worth or tax‑liability thresholds and renounces citizenship, the IRS treats them as if they sold all worldwide assets on the day before expatriation, taxing any unrealized gains.
- Trump‑era repatriation provision – The 2017 Tax Cuts and Jobs Act required multinational corporations to bring back earnings accumulated over the previous 31 years and pay tax on them, establishing a precedent for taxing unrealized gains on a large scale.
Potential Impact
- Beyond billionaires – While high‑profile fortunes such as those of Elon Musk, Jeff Bezos, and Bill Gates are often cited, the tax base would extend to any taxpayer with significant unrealized appreciation, including owners of privately held businesses, cryptocurrency holdings, and valuable collectibles.
- Liquidity risk – Taxing appreciation without a corresponding sale could force taxpayers to raise cash—through loans or asset sales—to meet tax obligations, raising concerns about cash‑flow management for illiquid holdings.
- Valuation challenges – Determining fair market value for assets like art, private‑company stock, or unique real estate can be complex and costly, potentially leading to disputes with the IRS.
Strategies Some investors are considering
- Relocation to low‑tax jurisdictions – Countries such as the United Arab Emirates, certain Caribbean nations, and Puerto Rico (under its Act 60 incentives) offer little or no capital‑gains tax and may not apply stepped‑up basis rules.
- Obtaining a second passport – Dual citizenship can provide flexibility to establish tax residency in a more favorable jurisdiction.
- Asset‑allocation adjustments – Shifting toward assets that generate ordinary income rather than capital appreciation, or using tax‑efficient vehicles (e.g., certain trusts), may mitigate exposure.
- Borrowing against assets – Some high‑net‑worth individuals have used margin loans or securities‑backed lines of credit to access liquidity without triggering a taxable event, though the proposed rules may restrict this practice.
Risks and Caveats
- Policy uncertainty – The proposals are still in draft form and subject to amendment; timelines for enactment are unclear.
- Potential retroactive application – If a “deemed‑sale” rule is adopted, it could apply to assets held for many years, creating large, unexpected tax bills.
- International compliance – Moving assets abroad may trigger reporting requirements (e.g., FATCA, FBAR) and could expose taxpayers to additional foreign‑tax obligations.
Bottom Line
U.S. lawmakers are actively exploring ways to tax unrealized capital gains and to eliminate the stepped‑up basis exemption at death. If enacted, these measures could raise the effective tax burden on investment appreciation to levels comparable with the highest global rates. High‑net‑worth individuals should monitor legislative developments, evaluate the liquidity implications of potential taxes, and consider jurisdictional diversification as part of a comprehensive wealth‑preservation strategy.
