Only 0.0028% of Americans would qualify for the unrealized capital gains tax that had Crypto Twitter up in arms this week

There have been rumors floating around recently that X falsely accused presidential candidate Kamala Harris of supporting President Biden’s 2025 proposal for a 25% tax on unrealized capital gains. What’s the truth behind the headlines, and what’s causing the confusion?

Earlier this week, thousands of crypto investors found themselves in the middle of a maelstrom of misinformation, with several prominent outlets reporting that US presidential candidate Kamala Harris supports a new tax on unrealized gains proposed by President Joe Biden for 2025.

Social media, especially X, was awash with anger as people retweeted and reacted to the clearly misinterpreted headlines, convinced that Harris wanted to tax unrealized capital gains at 25% next year. The mass dislike for X meant that members of the crypto community thought this proposed tax would apply to all US investors, regardless of their net worth.

Unrealized gains are the amount an asset has appreciated in value (say, in US dollars) before you sell it and make a profit. So if you bought Bitcoin at $50,000 and now see your BTC up more than 22% at today’s prices, you won’t really notice those gains until you sell your BTC.

BREAKING: Kamala Harris supports raising the long-term capital gains tax to 44.6% and also supports a 25% tax on unrealized capital gains for wealthy individuals.

— Spectator Index (@spectatorindex) August 20, 2024

The backlash stemmed from a misunderstanding that arose after Harris’ campaign team unveiled her economic plan last week and said on Monday that she would raise the corporate tax rate if elected, a proposal previously floated by the Biden administration.

Many were quick to assume that Harris’ team had formally approved the current administration’s entire tax policy proposal for 2025, which mentions unrealized gains as part of a new minimum tax on the ultra-rich.

But like most rumors that spread rapidly, this one was not true.

As noted by the crypto investor, professor, and prominent analyst of X, Harris’ team did not confirm, comment on, or otherwise reference the 256-page document titled “Public Disclosures.”
The report, titled “Administration’s Fiscal Year 2025 Revenue Proposals,” was published in March of this year.

So you idiots have done it again and started the gossip boiler.

Harris has not endorsed an unrealized gains tax.

-Harris’ campaign supported *increases* in corporate and personal tax rates over $400,000 in this plan.

They did not comment on the introduction of new taxes such as -… https://t.co/Jvv8JoYfJG

— Adam Cochran (adamscochran.eth) (@adamscochran) August 20, 2024

But someone at X had read at least part of the Biden-Harris administration’s sweeping proposal. The document includes a new 25% minimum tax on total income (including unrealized capital gains) for people with more than $100 million in net worth:

“The proposal generally calls for a minimum tax of 25% on total income.
unrealized capital gains, for all taxpayers with wealth (i.e. the difference received)
(Assets minus liabilities) Over $100 million.”

Biden’s 2025 tax proposal

Taken out of context (both because it was a proposal from the current administration and could only apply to a very limited number of wealthy individuals, and because Harris and his team did not support the proposal), the rumor took on a life of its own and spread throughout the crypto community.

Let’s examine what we know about Harris’ proposed tax policy, how it could impact the cryptocurrency market, and what experts have to say about it.

Deciphering Harris’ tax proposal and its impact on crypto

Last week, Harris unveiled part of her proposed economic agenda, which includes a number of tax proposals. While the details are still emerging, let’s break down what we know so far.

First, as noted above, Harris has expressed support for raising the corporate tax rate from 21% to 28%, a move that is expected to generate significant revenue for the federal government, potentially increasing tax revenues by as much as $1.4 trillion over the next decade.

The proposed increase in the corporate tax rate could impact crypto companies, especially larger entities like exchanges or mining operations.

Higher taxes could lead to reduced investment in new projects or increased fees for users as companies try to meet increased tax liabilities.

Another key aspect of Harris’ economic agenda is focused on making housing more affordable, with her proposing a variety of tax incentives to encourage the construction of new homes, especially for first-time homeowners and renters.

For example, it plans to offer tax breaks to companies that build affordable housing and provide up to $25,000 in down payment assistance to new homeowners to help offset rising housing costs in the U.S.

While the issue of tokenized real estate may come to the fore here, it is not yet clear whether housing-related policy proposals will affect cryptocurrency holders in any way.

What is Biden’s proposal on capital gains taxes?

Again, the confusion surrounding Harris’ rumored (but actually fake news) endorsement of Biden’s proposed tax on unrealized capital gains stems from a number of misunderstandings. But even if Harris didn’t endorse the plan, it’s not unreasonable to suggest she could do so in the future. So let’s take a look at what Biden’s 2025 tax policy plan actually entails.

Overall, Biden’s proposal includes several tax policy changes aimed at increasing the tax burden on the wealthiest Americans. Specifically, the proposal argues that current long-term capital gains tax policy disproportionately benefits the very wealthy:

“Preferential tax rates on long-term capital gains and qualified dividends are disproportionately
benefiting high-income taxpayers and providing lower tax rates for many high-income taxpayers
“More than many low- and middle-income taxpayers.”

The proposal aims to close a so-called “loophole” in the current system that allows wealthy individuals to pass on the value of their assets to their heirs without paying income tax on those gains.

Currently, long-term capital gains (profits from the sale of assets held for more than one year) are taxed at a maximum rate of 20%, with a few exceptions, or 23.8% when the net investment income tax of 3.8% is added.

Biden’s proposal calls for long-term capital gains to be taxed at ordinary income tax rates for high earners whose taxable income exceeds $1 million, with the rate increasing to 37% or 40.8% with the NIIT.

But that’s not the end of the story. Another proposal in the budget aims to increase the NIIT by 1.2% for those earning over $400,000, bringing the total NIIT to 5%.

This combination would effectively raise the maximum tax rate on long-term capital gains and qualified dividends for wealthy individuals to 44.6%.

To summarize: This 44.6% rate is the result of combining the proposed top regular income tax rate of 39.6% with the increased NIIT of 5% (which includes an additional 1.2% increase for high earners).

What about unrealized gains?

The much-disputed phrase “unrealized capital plays” is included in Biden’s 2025 proposal as part of a minimum income tax (25%) for the wealthiest Americans with net worth over $100 million (i.e. assets minus liabilities). As previously noted, this minimum tax for the “ultra-wealthy” would include unrealized capital gains and reportedly represents an effort to address a gap in the current system.

So how many Americans would be affected by such a change in tax policy? The answer is fewer than 10,000. There are currently 9,850 people in the U.S. who qualify as “centimillionaires,” meaning people with $100 million or more in wealth, according to the 2024 U.S. Wealth Report, released in March.

This means, just to clarify, that the speech that swept X earlier this week was actually about a tax proposal that would only affect 0.0028% of the US population, and that even the current Democratic presidential candidate doesn’t support.

US wealth report 2024 | Source: Henley & Partners

Of course, for most cryptocurrency investors and traders, the much-discussed and criticized tax proposal will not matter much.

Public reaction and debate

The recent controversy surrounding Vice President Harris and her (rumored) stance on taxing unrealized capital gains has caused a major storm on social media.

Harris is reportedly supportive of the Biden administration’s 2025 tax proposals, but Harris and her team have yet to formally approve all of the proposed changes.

Notably, an analysis by Americans for Tax Fairness in January 2024 found that U.S. billionaires and centi-millionaires had unrealized capital gains of $8.5 trillion in 2022. This could be a potential goldmine for federal revenue, but it has clearly also sparked intense debate.

Certified financial planner and CNBC advisory council member Douglas A. Boneparth launched a direct attack on the idea of ​​taxing unrealized gains, calling it “idiotic.”

Just a reminder that taxing unrealized capital gains is stupid.

— Douglas A. Boneparth (@dougboneparth) August 20, 2024

Aaron Levie, CEO of Box, shares the same belief, saying, “Unrealized gains are just a field in a database and are useless until they are converted into something valuable.”

Any policy proposed to tax unrealized capital gains is a bad policy. Unrealized gains are a field in a database and are not useful until they are converted into something valuable.

— Aaron Levie 🇺🇸 (@levie) August 20, 2024

Interestingly, according to Polymarket, Harris was once the frontrunner in a race with a high chance of winning the election, but her chances have recently dropped to 46%. Meanwhile, Trump, who was slightly behind, is now back in the lead with 53% odds.

Polymarket bets on winner of 2024 US presidential election | Source: Polymarket

Ultimately, regardless of whether you see this idea as a necessary step toward equality or simply “a field in a database,” one thing is certain: When it comes to tax policy, the devil is in the details. And if social media has taught us anything, it’s that even the smallest detail can lead to a major upheaval.