Elon bought twitter with unrealized capital gains.

Surely they became "realized" in the process.

It's called "Buy, Borrow, Die" -- in that scheme no one ever pays capital gains tax.

https://www.propublica.org/article/the-secret-irs-files-trov...

Nope, because he used a loan, so he was able to buy twitter and not pay taxes. He will have to pay taxes if and when he pays off the loan, maybe.

I have a hard time believing that he didn't realize gains on the Tesla stock he sold to cover part of the purchase.

Twitter, the company, took out a loan as part of the financing to help Musk close. That is why Twitter desperately needs to return a profit. Because it now has to service that loan.

Those are different things.

EDIT: For reference it looked like he originally was going to back the loan with Tesla shares—so he wouldn't have to sell. It looks like he abandoned that idea and sold about $15.5B shares of Tesla to finance the deal. Maybe that's where the confusion is from? https://www.aljazeera.com/economy/2022/10/28/how-elon-musk-f...

He used a margin loan for part of it (you can think of this as extracting money from unrealized gains, but it's kind of different), liquidated shares for part of it (realizing a gain in the process), and will pay interest on that margin loan (realizing a gain for each payment) for the duration of the loan. If he wants to pay off the loan, he will have to realize a gain. The margin loan is effectively tax deferral, not tax elimination.

Only because of how we've chosen to define income.

The proposal in the article is to tax wealth at an annual rate of 2%. Not realized gains. Not unrealized gains. Wealth.

Under such a system — unless I've badly misunderstood something — if a billionaire's assets decreased in value over the course of a year, they would still pay 2% on their assets. I can't think of any sense in which a decrease in the value of one's assets would be defined as income.

I have an opinion of the wisdom of a wealth tax, and I could be wrong. Regardless of my opinion, I think it's indisputable that a wealth tax and an income tax are different and that conflating the two makes a debate on the merits much more difficult.

Seems silly to debate a hypothetical tax you extrapolated from a single sentence.

The "billionaire's tax" Biden proposed earlier this year is closer an income tax that also includes unrealized gains and only if there are tens of millions in unrealized gains in that year.

That said: you pay property tax even if the value of your home declines. It's not that crazy.

The whole point of proposals like the one the entire linked article is about is to make it seem like vast sums of money can be raised from seemingly small taxes on a few wealthy people by definining those taxes as an annual percentage of total wealth rather than income. The framing is meant to trick readers into mentally comparing the 2% tax it proposes and the 0-0.5% tax it claims the wealthy are currently paying with the familiar 20-40% or more they have to pay on their own income, when in reality the two are calculated in vastly different ways and the article gives readers no way of putting it in any more meaningful context.

Maybe if you only read the headline?

I find the article pretty clear, though brief and not very well written. The actual report it's discussing is crystal clear.

The situation is that the wealthy keep getting wealthier without generating any taxable income. Obviously a minimum income tax rate could not possibly solve this problem unless we also redefine income.

I'd compare the 2% tax to the average yearly gain in the stock market. Based on https://www.nerdwallet.com/article/investing/average-stock-m... it appears that the overage again is about 7% to 10% depending on how you figure it. The rule of thumb that I've heard in investing is 5%.

Therefore, my conclusion is that a 2% wealth tax on the ultra-wealthy on average wouldn't even keep them from gaining wealth; they would just increase their wealth more slowly.

What happens if they are forced to sell stock in companies they founded and control, and after the sale they no longer have a controlling interest?

They pay 2% on their wealth.

Their wealth is usually stock in companies they founded.... Billionaires don't sit around with a billion dollars in their checking accounts.

They don't sit around with zero dollars either though, right?

Even without a wealth taxes there are situations where someone may need to borrow or sell assets to cover a tax bill. The billionaires will be ok.

> The proposal in the article is to tax wealth at an annual rate of 2%.

It is already! It's called the Fed's target inflation rate. Currently, everyone's net wealth is getting reduced at over twice that rate.

My wealth was $x one year. And $x + $y the following year.

If I work my ass off doing manual labor, $y gets taxed more than if I merely own equity that got me the same amount.

And people wonder why the middle class is dying.

In the US, the tax code is such that you pay taxes on capital when you've lost capital too, not just on the gains. This doesn't happen with normal wage income hence why it is treated differently. The lower tax rates on capital reflect the reality that you are paying taxes on the losses too.

Tax rates ideally should be flat for all sources of income net of risk, loss, and inflation. To achieve this you either allow deductions for these, which are limited or non-existent in the US, or you lower the tax rates to offset the fact that you can't deduct these.

I haven't heard that you're taxed when you lose money. My understanding was that If I invest $10,000 in a taxable account, lose $1,000, and withdraw the remaining $9,000, I won't pay taxes on the $9,0000 (ignoring transaction fees).

> The lower tax rates on capital reflect the reality that you are paying taxes on the losses too

No, you don't.

You actually get a tax credit (e.g. you pay LESS taxes), if you incur certain types of capital losses.

The tax reduction against income for capital losses rounds to zero for all practical purposes. Long-term inflation losses are not deductible at all in the US even though they can often exceed notional returns.

That's not what your original comment said at all.

You still haven't pointed out which capital losses get you taxed more. If you were referring to inflation, then why not just say that directly?

Why is it unthinkable to make billionaires generate some income to pay taxes? I pay property taxes on the "unrealized capital gains" of my house, and somehow I make it work.

You don't pay property tax on unrealized gains in your house. You pay it on the appraised value of your house. If you don't like that appraised value, you can appeal it (and many people do), and it often doesn't rise nearly as much as the actual value of the house.

"An appraised value" could work for companies too! Though, in fairness, for many billionaires the gains are pretty explicit i.e. we know the public stock price or the 409a valuation.

I don't know what you're arguing. You can contest the appraised value but rarely will you win unless it's egregious.

The appraised value is rarely very tightly linked to the actual value of the house. It gets adjusted once in a while, and if it's too high you can bring it down, but otherwise the appraisal tends to adjust with inflation while the house price tends to float relative to it.

I just don't understand how this has anything to do with the wealth tax. It's not an argument against a wealth tax, it's an argument in favor of a specific implementation: what value we're using to calculate the tax.

> It gets adjusted once in a while

It gets adjusted nearly every year for most people.

> if it's too high you can bring it down

No, you can't. Not really.

Personally, my property taxes are about 2.25% on a appraised value that is about 70% of the actual home value. This sounds great, let's use these numbers for a wealth tax.

> It gets adjusted nearly every year for most people.

For inflation, yes. Real re-valuations that mark the house to market are a lot more rare, and tend to only happen when a house is sold.

> No, you can't. Not really.

I have personally done this a couple of times, and all it tends to take is a nice letter explaining why the value is too high. At worst you need to get a new appraisal to support the letter. The value is rarely too high, though.

Property taxes in my area are also relative: the tax rate floats depending on how much the local government needs to raise. The sum of the appraisals for the city is added up, and your property tax is your proportional share of the total amount that needs to be raised. For me, that's usually around 1-1.5%.

This is all to say that property tax is not at all a tax on unrealized gains of your house. It's a tax on an imaginary number that occasionally adjusts to be similar to your unrealized gains, and often even has a rate that floats relative to it.

Didn't address my point, but thank you for the comment.

I do pay it on the unrealized gains though! As the value of the neighborhood/property increases, the appraised value goes up and my property taxes go up. This increases my taxes based on the increasing value of a non-income-producing asset.

Perhaps you shouldn't have to pay unrealized gains on your house?

Don’t like your odds of financing that scheme, unless you start taxing some billionaires

Cool - how are the roads, local police, fire etc. getting paid for then?

> I pay property taxes on the "unrealized capital gains" of my house, and somehow I make it work

Is the tax assessed value of your house actually the same or higher as its most recent market value? If something happened that would put your house market value below its tax assessed value, then you typically won't have any "unrealized capital gains" at all.

Somehow I doubt that, it usually lags true market value by at least 3-5 years.

> Is the tax assessed value of your house actually the same or higher as its most recent market value?

Why does this matter? Set an "appraised" value of stock portfolios > $10m, make it like the "worst downturn last 100 years" or something, and it would be more fair than home appraisals, and still generate the money we need.

These arguments are not in good faith IMO.

Could they also write off unrealized losses then?

It may be surprising, but wall street firms (for example) don't have a concept of "Unrealized capital gains". They mark to market on a daily basis and book the pnl and pay whatever tax. I know that at Goldman (where I worked) this is almost a religion, and I would expect it is the same at JPM and Morgan Stanley.

One reason the author is probably suggesting this is that there are a wealth of schemes whereby income can be deferred and tax avoided by use/misuse of unrealized gains.

> It may be surprising, but wall street firms (for example) don't have a concept of "Unrealized capital gains".

This is just false in my experience, well atleast for how you've stated it.

It may be true for some particular company but I don't know a single fund that doesn't track unrealized cap gains. Specifically around this time we start to look at how to defer realizing these gains till next year to push off the tax burden until the new year.

I mean, alot of large in the money option trades get written at this time of year just to lock in a price on a position that expires next year. We wouldn't do this if we didn't track unrealized cap gains.

Heck, the single largest impediment to growing wealth is taxes, we fixate an awful lot on the type of tax we pay and when we pay it.

Maybe you can expand on your response as it seems completely false to me that the concept of Unrealized cap gains doesn't exist.

This is indeed false for the kinds of people and companies they own that matter for this discussion.

To be clear I wasn't talking at all about buy-side. I was talking about big broker-dealers. They are all MTM as far as I know.

My point was that finance in and on itself doesn't depend on a concept of unrealized gains. It's perfectly possible to devise a system of taxation that just says you have to mark to market and then pay tax on that. There would for sure be complications around how you get valuations for illiquid investments etc.

Broker-dealers often have a short holding period anyway, so the use of MTM accounting is basically a wash and I imagine it's a lot easier than tracking exactly when you bought each security.

Things that banks and financial companies hold for a long time get a lot more care in terms of their accounting, in general.

It is true that they often choose mark securities to market on their balance sheets, and by doing that, they need to put that change in the balance sheet on their income statement. When that happens, in accrual accounting terms, it's income.

Those markings don't create cash, though. In cash terms, they are no different. Individuals are largely taxed in cash terms.

The mark-to-market value is notional, it is not a realizable gain. Having a vast amount of assets is precisely the part of the market where the gap between notional and realizable becomes quite large.

The entire point of the article is about taxing the wealth of extremely rich people rather than income because the wealth is structured to not generate taxable income.

I think there are two considerations here: (1) fairness, (2) good economic policy.

It's certainly not fair to have such a large proportion of power concentrated in such a minuscule number of people.

It's hard to see how it's a good economic policy either. We want there to be capital available to be invested in further economic activities (I think we do, anyway; there are people who would debate that). But we don't want -- and certainly don't need -- so much of it in so few hands. A wealth tax is a way to drain some of that away.