Billionaires are fuming about Kamala Harris’s ‘unrealized’ capital gains tax proposal—and getting it to work would be a heavy lift

On Aug. 21, the Harris campaign erased the mystery, stating that the candidate fully supports Biden’s comprehensive tax program as presented in the administration’s fiscal year 2025 budget proposal, issued in March. Overnight, we now know the Harris prescription in detail. That’s because a 248-page part of that document, General Explanations of the Administration’s FY 2025 Revenue Proposals, commonly known as “the Green Book,” contains all of the Biden administration’s ambitious recommendations for raising government receipts, from lifting the top personal income tax rate from the current 37% to 39.6%, to raising the corporate levy seven points to 28%, to mandating a huge funding increase for the IRS to bolster enforcement.

Unrealized capital gains, explained

The Green Book for FY 2025, now apparently adopted as the core of Harris’s fiscal agenda, dedicates three pages (83–85) to describing the policy that the media has widely labeled as “the billionaire tax.” Its official title: the “Minimum Income Tax on the Wealthiest Taxpayers.” Put simply, what we’ll call the “min-tax” would impose a floor levy of 25% on the total of regular income plus capital gains on all taxpayers holding a net worth of over $100 million.

For this superrich cohort, the system would upend this nation’s long-standing treatment of all capital gains. Today as always, all folks who file those returns due on April 15 pay the cap gains taxes on the dollar amount that the net value of their assets increased over the past calendar year, exclusively when those stocks, bonds, or houses are sold, or the gains are “realized”; in other words, taxpayers write the checks or transfer the cash to the IRS only when they pocket the proceeds that those taxes are typically paid from.

By contrast, the min-tax would throw the ultrawealthy into a totally different regime, while leaving everyone else under the old rules. The $100-million-plus crowd would pay the capital gains rate not on realized but paper gains. The proposal mandates that they send the Treasury advance payments based on the annual increases in the value of investments they haven’t yet sold. Switching to a process where any group of Americans gets taxed, as the Green Book puts it, “on income inclusive of unrealized capital gains” would mark one of the most fundamental shifts in fiscal policy since Congress first imposed capital gains taxes in 1913.

The minimum rate of 25% would further punish the wealthiest Americans. That’s five points higher than the burden they now carry at the current top bracket of 20% for long-term capital gains.

Though it’s a wonky exercise, grasping how the minimum tax on unrealized capital gains would work is crucial to handicapping its economic impact if enacted. Of course, making the proposal law remains a long shot. But if Democrats pull a trifecta by winning the presidency plus majorities in the House and Senate, it’s highly possible that that this construct so far limited to modeling by think tanks and Democratic number crunchers will soon make America the sole industrialized country that taxes “income” that the taxpayer can’t yet spend.

That journey into uncharted fiscal territory runs substantial risks. A number of America’s top businesspeople detest the concept. “You don’t want a tax policy that destroys the economy,” fumed hedge fund titan Bill Ackman. “No one will ever start a business in America anymore.” Billionaire money manager Leon Cooperman branded the plan “stupid” and “probably illegal,” and Elon Musk dismissed it as a ruse to sidestep the real problem, wildly excessive government spending. A number of economists, including David R. Henderson of the Hoover Institution and Bruce Sherrick of the University of Illinois, warn that the measure would trigger capital flight and a brain drain by imposing a heavy toll on the nation’s job creators, stifling innovation that brought us Google, Amazon, Nvidia, and Tesla.

Though it would target the rich, this proposal gets mislabeled as a ‘wealth tax’

It’s crucial to emphasize what this proposal is not. “Billionaire tax” is a misnomer, since the min-tax sets the bar way below 10 figures at $100 million. Besides, the blueprint for targeting unrealized cap gains often gets wrongly characterized as a “wealth tax.” It’s really far different from the genuine article championed in bills introduced by Sen. Elizabeth Warren (D-Mass.) in 2021 and 2024, and cosponsored by half a dozen Democratic senators including Bernie Sanders (D-Vt.). The Warren measure would impose a 2% annual rate on an individual’s entire wealth, from $500 million to $1 billion, and 3% over that $1 billion. Hence, that’s a bite taken from their gigantic nest eggs, not their incomes.

The min-tax does have a wealth element in that it would only be assessed on those with a net worth of over $100 million. But the Biden, and now Harris, Green Book template mainly takes another tack. It hits income, not net worth per se, and aims at the biggest source of income for the superrich: capital gains. Biden has often declared that it’s outrageously unfair that sundry rich Americans pay a share of their incomes that’s lower than the average for teachers, truck drivers, and construction workers.

The Green Book plan seeks to fix what Biden and Harris view as the tax code flaw that’s largely responsible. Under the current rules, the rich have a big incentive to hold stocks, buildings, shares in privately owned companies, and other assets for extremely long periods while paying no taxes, since the bill now comes due only when they exit.

The Biden FY 2025 budget manifesto argues that the current system is bad for the economy and worsens inequality. The document asserts that the “paying only when you sell” structure encourages the wealthy to “lock in portfolios primarily for the purpose of avoiding capital gains on appreciation, rather than reinvesting the capital in more economically productive investments” so that “reform to taxation of capital gains will reduce economic disparities among Americans and raise needed revenue.”

Such experts as liberal research hub the Institute on Taxation and Economic Policy and Harvard economist Jason Furman agree, viewing the min-tax as both an advance for fiscal fairness, and an engine for boosting receipts. Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center who formerly helped forge policy for Congress’s Joint Committee on Taxation, told Fortune that warnings the plan would prove a growth-killing disaster are grossly exaggerated. America’s ultrarich, he reckons, are frequently holding huge blocks of stocks simply to skirt paying the rising tax liability that they’ve got ample resources to cover right now. “They’re locked into a poor portfolio for tax reasons,” he says. “Forcing them to dispose of stock does not dampen entrepreneurship or venture capital.”

The Green Book “revenue proposals” project that this raid on unrealized income would raise $502 billion over the next decade. Interestingly, Biden’s 2023 budget advocated a much lower minimum rate of 20% that would have raised about one-third fewer dollars.

Inside the mechanics of a new min-tax that Harris now embraces

The Green Book plan requires that the $100-million-plus crowd provide the IRS each year with a complete accounting (with exceptions) of the changes in the value of their assets each year in individual categories, as well as update the cost basis of those holdings. That amounts to a huge annual mark-to-market exercise. The document doesn’t spell out the specific classes to be reported separately, but presumably they would include stocks, bonds, and commercial real estate portfolios, shares in private companies, assets in trust funds, and such personal items as homes, cars, and art collections.

The taxpayer would tally the gains and losses from all of these baskets to get a net number. They would then add that figure to their regular, non-cap-gains income to arrive at a taxable total. The vast bulk of that all-in figure is likely to be the unrealized capital gains this rich person wasn’t paying tax on before.

The biggest hit would come in the year the plan is enacted. The qualifying superrich would book a flat 25% liability on all the accumulated gains they’re now sitting on. To soften that sudden pounding, the plan offers the option of making the payments in equal installments over nine years. Even so, folks like Elon Musk, Mark Zuckerberg, and Jeff Bezos could be writing one-time checks for tens of billions. Thereafter, the ultrahigh-net-worth contingent would owe 25% on the increase in the net value of their assets from one year to the next. From year two onward, the program allows them to pay the annual bills over half a decade.

Let’s walk through an example. A serial entrepreneur we’ll call Harry founded XYZ Industries 10 years ago by investing $10 million, and now the private enterprise is valued at $100 million. He’s amassed a $90 million paper gain, but under the current system, that increase and rises in the future, won’t be taxed until he sells all or part of XYZ. If the Biden-Harris proposal becomes law, Harry gets an immediate tax hit of $22.5 million (the 25% minimum rate times the $90 million cap gain). At the end of year one, his “cost basis” would reset from $10 million to $100 million.

But say in year three, XYZ encounters a rough patch and raises new capital at a valuation of just $90 million. Harry’s just suffered a capital loss, since his new cost basis is $100 million. But the IRS doesn’t send him a refund for 25% of that $10 million decline, or $2.5 million. It simply books his account for a credit of that amount against future gains or losses. If XYZ eventually sells for less than the $100 million valuation Harry initially paid tax on, Harry only gets money back at the time the transaction closes, and never before.

The “minimum tax” provides a pair of carve-outs that, while perhaps essential, make its workings potentially cumbersome, and could undermine its power as a money-raiser. The first involves the plan’s distinction between “tradable” and “non-tradable” assets. This part mandates that for such tradable investments as stocks and bonds bought, sold, and continuously quoted on public exchanges, the ultrawealthy mark holdings to market each year and pay the 25% tax on the gains. That requirement is relatively straightforward.

But the provisions are different for “non-tradable” assets, such as holdings in private companies, ownership of houses and apartment buildings, and private equity or venture capital investments. They’re not traded on exchanges, and can be difficult to value. That limits the taxpayer’s ability to track annual gains or losses.

The plan’s language on the issue isn’t totally clear. But it appears to stipulate that investors are obligated to mark these non-tradable investments to market whenever their asset is officially revalued—for example, when the homeowner or landlord gets an appraisal for a new mortgage on a house or office building; a venture capital firm raises a round at a new valuation; or a family company welcomes a new equity investor at a share price that establishes a fresh value for the enterprise. If the asset isn’t reappraised or revalued in a given year, the investor can file the same “basis” as in the last tax filing.

The program, however, imposes requirements that prevent investors from reporting no gain year after year simply because their assets haven’t been revalued. It states that in the years when assets aren’t officially marked up or down, the owners will add an annual increase in value equivalent to the five-year Treasury note yield, plus two percentage points. Right now, that number’s around 6%. So investors aren’t getting a free ride. They would still need to pay the 25% tax annually on the automatic markup.

The second exception applies to taxpayers “eligible to be treated as ‘illiquid.’” That cohort is defined as those whose tradable assets account for 20% or less of their net worth. The idea is that they shouldn’t be disadvantaged if they don’t have the ready cash to cover the tax on unrealized gains.

This group isn’t obligated to report changes in valuation of their “untradable assets,” even if they’re revalued via a financing, say. In theory, the protection would shield owners of private companies worth hundreds of millions or more who are “cash poor” from having, for example, to sell their entire businesses just to cover the taxes. If the “illiquid” contingent elects not to report increases in the value of their non-tradable assets, they’re subject to a “deferral charge” of up to 10% on the capital gains when they eventually sell. That could raise the total hit to 35%, the 25% minimum tax plus the 10% charge.

The ‘minimum tax’ is really a prepayment plan

Here’s the min-tax proposal’s real significance. It’s effectively an “estimated” or “withholding” plan that takes the cash currently due years from now upfront from entrepreneurs, venture capital, and the wealthy investors who are the biggest force in funding startups, and sends those hundreds of billions to the government upfront. That cancels a big benefit for rich taxpayers: the ability to hold investments that compound in value tax-free for many years.

“It really amounts to the acceleration of tax payments,” says Alex Brosseau, senior manager of tax policy at Deloitte Tax LLP, who worked as a senior analyst on the Senate Budget Committee. “It pulls dollars forward out of people’s hands and sends those dollars to the Treasury.” For example, under the current system, hedge fund magnates holding hoards of Apple stock don’t need to sell any shares to pay tax on the rise in the iPhone-maker’s stock price year after year. They can keep all their holdings tax-free until they sell.

But under the min-tax, the moguls might be forced to dump part of their iPhone-maker stakes to cover the annual amounts due in cash as Apple’s price rises. In that instance, they have fewer and fewer dollars invested in Apple as the years go by, don’t get the dividends on the shares they sold to cover the levies, and can’t reinvest the proceeds in other equities or in bonds, because that money’s going to the U.S. Treasury instead. Private investments fall, federal revenues swell. Or they could keep their Apple stock by taking out margin loans, and paying a big interest bill they don’t have now.

Says accounting ace Baruch Lev, NYU professor emeritus: “The plan is absolutely a tax increase. If I pay the tax now and would sell in five years, I lose the growth of that money that I paid in taxes for those five years. My concern is that it negatively affects investment and is a disincentive for risk-taking and innovation.”

A minimum tax regime would also be extremely complex and costly to implement. The IRS would need to determine if the value investors place on their art collections, houses, apartment complexes, and other non-traded assets is legitimate. Taxpayers would have a strong interest in claiming to be “illiquid,” and thus avoid marking up the value of their assets and raising cash to pay the min-tax each year. The IRS would need to review all of a nine-figure taxpayer’s holdings to see who qualifies, and who doesn’t. “The knock is that it’s novel and that taxpayers would play with the guardrails to avoid the tax,” says Brosseau. The rich could take on extra leverage to keep their official net worth just below the $100 million mark, not because it makes business sense but just to avoid the yearly tax load.

Another unnoticed potential bombshell: The Green Book proposes raising long-term cap gains rates for taxable incomes over $1 million to 39.6%, versus the current 20%. But the minimum tax, though above the proposed rate of 25%, is far lower than the top bracket that Harris now favors. Hence, even after paying the min-tax, the rich person would get pounded by an additional tax of 14.6% on the sale (the difference between the 25% min-tax and the 39.6% that the Green Book advocates). If Harris gets her full wish list, the temptation to raise the min-tax toward the 39.6% rate, assessed when the assets are actually sold, will prove powerful.

A “tell” on how difficult the job might be: In the FY 2025 budget, the Biden administration asked for an astounding $104 billion in extra funding for the IRS over 10 years, in addition to the $80 billion jump granted under the Inflation Reduction Act. America’s actual and aspiring superrich will be extremely unhappy advancing the Treasury loads of cash that they effectively kept invested for themselves. It makes sense that the U.S. will need a newly empowered, super-heavily-funded watchdog that forces our ultrarich to comply with a system that would represent the boldest, and potentially most disruptive, experiment in recent American fiscal history.