Why should unrealized gains be taxed?

You can get interest-free loans against your illiquid assets. With enough income coming in to replace the spent money, it's essentially as if you're spending the illiquid assets themselves, without having had to liquidate (and thereby pay taxes on) them.

This is really more like using the illiquid assets as collateral, not like spending them. The loan payments still need to be made from income, or by liquidating assets, both of which would be taxed.

It's plain-old collateral if you're just spending the money normally, sure. But you can also take that loan and use it as leverage on a bet (i.e. a risky investment.) Then, your upside is more untaxed capital gains; while your downside can be immediately repaid by liquidating the assets, leaving you only with the need to pay the taxes.

There is a reason that investment firms exist: this process is a ratchet for making untaxed (or less-taxed) income.

But the monthly loan payments need to be made somehow, no matter what you use the loan for.

If you pay them with income, you paid income tax.

If you pay them by liquidating assets (including assets you purchased with the loan money and then sold), you pay capital gains tax (unless you sell for a loss).

In this case, I was assuming a risky investment that returns within the same month.