The Truth Behind Kamala Harris’ Unrealized Capital Gains Tax Crisis

Social media is abuzz with accusations that Kamala Harris wants to tax the earnings you can have on the house you still live in 20 years from now.

Short answer: Not really. (Only if you’re worth $100 million.)

There’s another piece on the web that says Kamala Harris wants to tax you on the gains on the five or six shares you own, even if you haven’t sold the shares.

Short answer: Again, not really.

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So why do the taxes? First, it appears to be fairly traditional election disinformation.

Kamala Harris is in the hot seat on capital gains taxes.

Michael A. McCoy/Getty

Proposed changes to the capital gains tax code

The campaign is being waged against the Biden Administration’s March tax proposal, which would raise taxes on the very wealthy on income, capital gains and the like.

But the target has changed now that Harris has replaced Joe Biden at the top of the ticket against Donald Trump.

It is not meant to derail your tax plan. It has to survive a difficult road of implementation.

• Harris has to win.
• Democrats need to gain control of Congress and then get a tax bill introduced and passed.
• The legislation would have to face court battles that could reach the very conservative Supreme Court.

The campaign now underway is designed to combat Harris.

The Biden tax plan has two main goals: First, to generate more revenue for the federal government and reduce growing deficits. (The national debt is about 99% of Gross Domestic Product.) Second, rebalancing the tax code so that the wealthy contribute more to the effort.

The plan would start by raising the top corporate tax rate from 21 percent to 28 percent, which could raise $1.3 trillion over 10 years.

It would maintain top tax rates for everyone earning $400,000 a year or less at current levels.

The tax plan would raise the top rate for the wealthy to 39.6 percent from the current 37 percent.

To be clear, it would raise capital gains taxes on very high earners. Capital gains would be taxed at the normal top rate if you earned more than $1 million a year.

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And it does two more things that would profoundly change the capital gains game as we know it.

It might get rid of the boosted base

Basis is the original cost of an investment, whether stocks, bonds or houses.

Suppose an investor buys shares in a company for $100. The price rises to $150 after one year and the investor takes his profits. She only pays tax on the $50 gain.

Stepped basis refers to what happens when the investor holds the stock until they die. He paid no capital gains tax. The tax code allows her heirs to inherit the stock at $150 without taxing it. If they sell the stock at a higher price, the capital gain is based on the $150 basis.

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Let’s look at a more extreme possibility: our investor bought 100 shares of Nvidia (NVDA) to $12 in March 1999, just after the company’s initial public offering. She held onto her investment through six splits, the last being a 10-for-1 split on June 10. But it died on Monday when the close was $126.46.

First, the initial price of $12 (which it maintained for at least the first month after the IPO) became 4 cents due to splits. But our investor now owns 48,000 shares worth $6.07M. Her heirs would get everything with a new basis of $126.46. In other words, totally tax free.

Any gain from the sale of shares by the heirs will be the difference between the sale price per share and $126.46.

This provision causes problems for many people, and there have been several attempts to repeal the enhanced basic provision since the 1980s, without success.

The Biden plan, which Harris endorsed, taxes heirs’ earnings on the original basis. So all of our $6.07 million Nvidia earnings would be taxable.

The probability of repealing the provision if Donald Trump is reelected is less than zero,

That’s not likely to happen if Harris wins, however, because a number of Democrats are opposed to the idea.

Taxes on unrealized capital gains

This is the one that generated a lot of howling.

The Biden plan calls for a 25 percent tax on unrealized investment gains. This is the gain at the end of the year, even if the shares or house were not sold.

That was enough to prompt conservative tweeter Mike Czernovich to write to X:

“If you own a home, deduct from the Zillow estimate what you paid for it. Be prepared to pay 25% of this in a check to the IRS. This is your unrealized capital gains due under the Kamala Harris proposal”.

It’s just not quite what the plan says.

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The Unrealized Gains Tax would ONLY apply to the returns of taxpayers with wealth over $100 million. (A note: The number of US citizens worth $100 million or more was just under 10,000 at the end of 2023, according to Henley & Partners, an English firm that helps wealthy people move to places like the United States.)

Nearly 86 million American homes are owner-occupied. So almost all of these owners would not be affected.

But the idea is something you don’t see in the tax code of the 1920s.

Capital gains taxes only apply when the gain is realized. (A polite way of saying you got the money.)

So let’s say our Nvidia investor decided she wanted to sell $1 million of her Nvidia bonanza and donate the proceeds to her local Boys and Girls Club. She would be liable for a capital gains tax on the sale of shares.

Where they might take issue with Biden’s proposal is if:

• She is worth more than 100 million dollars.
• She has that big Nvidia stake.
• He has a huge unrealized gain.

It’s even more complicated. How is the wealth number calculated? How is unrealized gain calculated? Does the IRS have the staff to determine whether earnings are properly declared and calculated?

It is not clear. And there is still no law. Major changes to tax law can take years to pass. And any Biden/Harris tax plan will be hotly contested because 10,000 people won’t want the headache.

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