What Your CPA Wants You to Know
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What Your CPA Wants You to Know
83. Understanding Unrealized Capital Gains Tax: POSSIBLE New Tax Law!
New tax laws coming in hot. Have you wondered what an unrealized capital gains tax could mean for you? Discover how the proposed tax changes could impact investors, from high-net-worth individuals to everyday people, and why it's crucial to stay informed even if you're not a millionaire.
Join us as we discuss this proposed change and why its not as terrible as it sounds, for now! :)
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If your net worth is above a certain threshold and you're one of the people that they target with this then if your value of your asset went up, you have to pay tax on that, even if you don't sell it. Welcome to what your CPA Wants you To Know.
Speaker 2:Tax and accounting help can be expensive, so we've created this podcast to help guide you through it all and make you feel like you have a CPA in your back pocket.
Speaker 1:I'm Carson Sands.
Speaker 2:And I'm Taryn Sands.
Speaker 1:I'm a CPA with over 10 years of experience helping people start and grow their businesses.
Speaker 2:And I'm an MBA with a specialization in marketing and entrepreneurship. Taxes suck and we want to make sure you don't pay more than your fair share.
Speaker 1:We're here to share everything your CPA wants you to know.
Speaker 2:In a fun and easy to understand way.
Speaker 1:Let's get started.
Speaker 2:Let's do it. This was actually not going to be our episode for today, but we keep getting lots of questions about this new possible tax change, so we decided just to do a really quick episode on this to clear up any confusion you may have on this topic, and postpone our next week's episode. So today's episode is all about unrealized capital gains tax.
Speaker 2:Yes, I keep forgetting what it's about, but yes, that's what it's about. We've had a lot of clients follow up and Carson's been talking to them about whether this applies to them or not, so we thought this would be a great episode for everyone. But first, if you don't understand what this is at all, carson's going to explain what this is. That way, you can determine if this applies to you or not.
Speaker 1:Okay, before I explain unrealized capital gains tax, I want to make sure everyone understands what unrealized capital gains are and kind of to explain that you kind of need to understand what capital gains are, or realized capital gains.
Speaker 2:And you need to do it as simply as possible.
Speaker 1:Okay, I will try not to put everyone to sleep, so let's make it very simple, real quick. Let's say I buy a share of Facebook, a stock share of Facebook. It goes up in value. I paid $10 for it and now it's worth $15. So I have a $5 capital gain. If I don't sell that stock it's an unrealized capital gain I don't have to pay tax on that increase.
Speaker 2:Currently Until you sell it.
Speaker 1:Right. If I sell it, it becomes a realized capital gain. And then I pay tax on not the $15 that I sold but just the $5, which is the increase from what I originally paid for it. I think a lot of people understand that part, but I just wanted to make that clear. The unrealized gains are the gains that you have in any investments before you actually sell them and realize the gains by selling that asset. So it's whatever the value has increased by since you bought it while you're still holding onto that asset. And it applies to real estate, it applies to stocks, bonds, there's all kinds of things. It can apply to even gold and precious metals. Anything like that could be considered an unrealized capital gain.
Speaker 2:And it's been brought up that they want to put a tax on unrealized capital gains.
Speaker 1:That's true. Now, first of all, I will tell everyone that the current proposal is to put the tax on people whose net worth is over a hundred million. So for anyone that didn't just immediately turn the episode off, it's still important, because many times they start off with the higher earners and at some point this was supposed to be only people with a billion dollar net worth and then it trickles down to us eventually. But also just so you can argue with your left-leaning friends on this economic concept, then it's important to understand what it is and who it affects and how it works. So an unrealized capital gains tax would just mean that if your net worth is above a certain threshold and you're one of the people that they target with this then if your value of your asset went up, you have to pay tax on that, even if you don't sell it.
Speaker 2:That kind of blows my mind, because how are they going to track all this? Say, you are really rich and you have all these properties and from one year to the next all the values went up. They're just going to send you a bill on their estimated value, kind of like on our property taxes, exactly.
Speaker 1:Now I know most family farms aren't worth $100 million, but let's use that as an example. But let's say it's. I don't know the Kellogg family. Let's say they own a lot of wheat farms. I don't even know if that's true, let's just pretend like it is. And so they own I don't know all of the Midwest, so that they have quite a bit of farmland and, yes, they have a lot of money too. But the value of their land is going to increase every year, because that's what land does, and most years anyway. And now, all of a sudden, they're going to have to pay tax on however much the value of their land went up. Even though they didn't sell it, they're still using it to, you know, to grow food and stuff.
Speaker 2:Right. Which is why I think this is becoming such an issue with people is because it sounds pretty crazy.
Speaker 1:It does. And let me give you two more examples, because I do want to be fair and say the pros and cons. So let's say there's a person that inherited all their money and they're sitting on $250 million in stocks and investments and they don't work. They just haven't invested and they never pay tax because even when they need money to buy things, they don't go and sell some of those stocks to turn around and go buy things. Usually what they do is they go get a loan against the stock from their own investment company, essentially, and so they take that money and they buy the things that they want and then they slowly pay that loan back over time, and what that allows them to do is to not actually have to pay tax on the capital gains and still get use of that money. And that's something that a lot of people don't like, and I can kind of understand that, because it is cheating the system a little bit.
Speaker 1:And on the flip side you have another example, like, let's say, elon Musk. He doesn't own hardly anything except for the companies that he owns the majority of and doesn't really invest his money in stocks. Let's say At least that's what people say so the value of Tesla and SpaceX goes through the roof. Well, now he's having to sell shares of a company that he owns majority stakes in to pay this tax bill for his unrealized gains, and that one doesn't seem fair to me, because now he could lose control of those companies by selling off shares to pay for this tax. So that really doesn't seem as fair as the first example, where it's somebody that's just sitting there watching their stocks grow. It's companies they don't care about, they don't even participate in the operations of, they just own some small percentage of the shares I mean. So those are the two arguments that people are making.
Speaker 2:So it's not going to affect as many people as are asking us about it. Obviously because there's that really high income threshold, but how likely is it that this is even going to be an issue If?
Speaker 1:Certain people get elected, it's one of their top priorities that they want the bill to be pushed through and become a law and everything. So I mean it could definitely happen Now. Will it affect most of the people listening to this podcast? No, because currently the proposal at least says that it's for people that have a net worth of over $100 million. Well, I think it will affect everyone, but it will not directly affect anyone who doesn't have a net worth over $100 million, so you don't need to panic about it.
Speaker 1:But whenever people are making their arguments pro or con against this, I just want them to know the facts of exactly how it's going to work. And I mean, and that's the way it works, they will tax you on money that you don't actually necessarily have. You on money that you don't actually necessarily have. Now, if they're worried about the people that are using margin loans and things like that from their investments, then they could tax just that, or they could come up with another way to stop that. They could make a rule where you can't do that, where they don't punish everyone else who's just trying to grow a company or grow a business. So I don't know. I think there's a lot of solutions that don't involve taxing every single person who has unrealized capital gains and has a high net worth.
Speaker 2:Right, and I mean there could be a lot of changes made before this ever actually happens, or it could not happen at all, so we really just don't know at this point, but it's definitely a hot topic right now.
Speaker 1:So if you're arguing with your brother-in-law about this or with your uncle at a family event, at least now you'll have the facts and you won't sound stupid.
Speaker 2:Well, there you go. We do have an episode coming up towards the end of this year that's going to be all about tax changes that you do need to know. That will apply to most people. That will be for the upcoming tax season, so stay tuned for that.
Speaker 1:Yes, and those will be things that actually have already passed or are very, very likely to pass and be retroactive to 2024.
Speaker 2:Yes, That'll be the information that you actually do need to know when you go to file your 2024 tax return. So we apologize if this was like a super boring episode, but it definitely has been coming up a lot and we try to pay attention to that and get episodes out. If there's something you would like us to cover, just send us a DM on Instagram. Until next time. Thank you so much for listening to.
Speaker 1:What your CPA Wants you To Know.
Speaker 2:Podcast.
Speaker 1:This podcast is intended to provide accounting and tax information for educational purposes only. All tax situations are unique and should be handled with the assistance of a tax professional.