Taxes on Unrealized Gains Are Coming

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A replay of this morning’s Masters in Trading Live event tonight … what worries Warren Buffett about our government … “The Druck” is worried too … taxes on unrealized gains are likely coming

Before we dive into today’s Digest, a quick note for anyone who wanted to join Jonathan Rose at this morning’s Master in Trading Live event yet had a scheduling conflict.

Given the huge interest we’ve received, along with our awareness of the challenge that some viewers had in attending this morning, we’re rebroadcasting this morning’s event tonight at 8 PM Eastern. If you click here, it will automatically register you to join us at the encore replay.

If Jonathan is a new name for you, he’s the latest addition to our corporate family, and is the analyst behind Masters in Trading Live . He’s made more than $10 million trading in the markets over his career ($4 million of that came during the 2008 financial crash alone).

This morning, Jonthan went live to walk attendees through the specifics of how he profits in the markets. And the early feedback we’ve received has been phenomenal.

Tonight’s encore performance would be well worth your time if you fall into any of the following categories:

  • You want to profit from this bullish market but feel uncomfortable with its valuation, so you’d rather make shorter-term trades rather than longer-term buy-and-holds
  • You want to master a trading approach that doesn’t require a bull market for you to generate triple-digit returns
  • You want to understand options in a simple, no-fuss way that demystifies this powerful asset class and clearly lays out the risk/reward tradeoff
  • You want to learn how a veteran trader finds attractive trade set-ups, and how he’s sizing up today’s market.

I’ll note that beyond appreciation for Jonathan’s profitable trade ideas, the most consistent feedback we’ve received is that he’s a fantastic teacher. This makes sense, as one of Jonathan’s main goals is to empower his viewers to become great traders themselves, no longer needing him.

Again, here’s the one-click link to tonight’s replay at 8 PM Eastern. And if you’re one of the growing number of Jonathan-fans, we’d love to hear from you. Email us your story at Digest@InvestorPlace.com.

Meanwhile, you’d better start making a lot more money from trading (or whatever) if you want to maintain your current lifestyle because Uncle Sam is coming for your wallet

At least that’s what Warren Buffett believes.

This past Saturday, “Uncle Warren” spoke at Berkshire Hathaway’s annual shareholder meeting in Omaha, affectionately known as “Woodstock for Capitalists.”

Here’s Buffett speaking about our federal government’s inability to keep its financial house in order, and the likely impact on your wallet:

I think higher taxes are likely.

They may decide that someday they don’t want the fiscal deficit to be this large because that has some important consequences.

And they may not want to decrease spending, and they may decide they’ll take a larger percentage of what we earn, and we’ll pay it.

Sure, we’ll pay it. But with history as our guide, our increased tax payments won’t be enough because our politicians will blow it. So, we’ll be writing another Digest along these same lines in a few years, referencing even higher taxes on the way.

Buffett’s take on our government’s financial situation is interesting

He’s less concerned about the size of the national debt, and more concerned about the size of the fiscal deficit.

For anyone fuzzy about the difference, our nation’s total public debt is the sum of what our government owes its creditors. That currently clocks in at $34.7 trillion (by the way, our government’s unfunded liabilities – think programs like social security – is $215 trillion).

For a little perspective on this surging $34.7 trillion debt figure, The Kobeissi Letter reports that over the last year, federal debt has climbed an average of $100,000 every second. And since March 1st, our government has been racking up debt to the tune of $10 billion…per day.

As to the fiscal deficit, that’s the difference between our government’s income and its spending. So far in 2024, our deficit measures $1.1 trillion. This is $46 billion more than the same period last year.

Here’s Buffett:

My best speculation is that U.S. debt will be acceptable for a very long time because there’s not much alternative…

I don’t worry about the quantity, I worry about the fiscal deficit…  The fiscal deficit is what should be focused on.

But why, exactly? What’s the real concern?

To answer that, let’s turn to another billionaire investor who has just sounded the alarm on our government’s spending

Yesterday, billionaire investor Stanley Druckenmiller of Duquesne Family Office made an appearance on CNBC’s “Squawk Box.”

We’ll pick up with “The Druck” speaking about the deficit spending:

They’ve spent and spent and spent, and my new fear now is that spending and the resulting interest rates on the debt that’s been created are going to crowd out some of the innovation that otherwise would have taken place.

There’s a name for what Druckenmiller is describing: the “crowding out effect” theory.

It suggests that increased government deficit spending, leading to higher interest rates, ultimately requires more taxes. This tax burden demands a reallocation of capital within businesses (and family budgets) – away from research, productivity, and growth – toward the government’s black hole of spending.

Hopefully, we’ll avoid this outcome, or perhaps AI will enable us to skirt the crowding out effect. But even if so, it’s probably safe to assume that Buffett’s prediction about higher taxes is accurate.

On that note, keep this landmine on your radar

President Biden’s proposed budget for 2025 would impose a tax on unrealized gains for ultra-high-net-worth individuals.

This is exactly what you think it is – a tax based on paper gains, not sold-and-realized profits in your bank account.

In other words, your well-timed investment in Nvidia that made you, say, $15,000 richer on paper (because you haven’t sold)? Well, you now owe taxes on that $15,000.

And if you’re wondering “how in the heck am I supposed to find the cash to pay a tax bill on a big paper gain if I didn’t actually sell it?”

Well, that’s your problem. Pay Uncle Sam his money.  

Oh, and if Nvidia crashes next year and all those gains disappear? Well, too bad. But at least you’ll have a loss you can use to offset future tax payments on your unrealized gains.

To be clear, as proposed, this would only impact Americans worth $100M or more

So, it’s unlikely many investors on our Digest file would get hit. Also, this proposal won’t pass – at least not this year. Too many people loathe the idea.

But we shouldn’t ignore it. Our culture is changing, and it’s likely that we’re headed toward this outcome eventually. And to believe it won’t ultimately impact regular investors like you and me is giving our politicians too much credit.  

To illustrate, I’ll point toward the Alternative Minimum Tax (AMT).

For anyone less familiar, the AMT was a tax Congress enacted in 1969, originally targeting 155 wealthy Americans (they had adjusted gross income above $200,000).

These investors had paid zero federal income tax due in large part to their municipal bond gains which were exempt from federal income taxes. People were furious that these rich Americans had skirted taxes, so the AMT was introduced to prevent it from happening again.

Of course, as inflation and personal incomes climbed over the decades, the AMT tax threshold ensnared more and more Americans who were hardly “wealthy” by 1969 standards. Yet the tax remained.

By 2010, the AMT was nailing 30 million Americans. Congress finally stepped in and reduced the scope of the tax in the Tax Cuts and Job Act (TCJA) of 2017. But by this point, consider how much money the government had taken from non-ultra-rich Americans.

By the way, guess what… If Congress doesn’t act, the pre-2017 AMT framework will restart in 2026!

My point is that even if our government plans to target only a small group of uber-wealthy people with taxes on unrealized gains, scope creep often kicks in. It’s a safe bet that our politicians won’t be quick to change policy after they get a taste of more and more tax dollars.

To be clear, the risk isn’t just that inflation pushes the net worths of regular Americans up into taxable range – it’s that the taxable range falls to ensnare regular Americans

With our government unable to stop spending, inflation still climbing, and calls for more “equitable” policy growing louder, expect yesterday’s “just for the wealthy” tax proposals to broaden, eventually hitting you and me.

Here’s The Boston Review, from its article titled “Yes, Tax the Rich—and Also the Merely Affluent”:

There are plenty of reasons to expand the conversation about higher taxes to some of those in the 99 percent—specifically those with incomes in the 90th to 99th percentile. Let us call them the affluent.

These Americans belong to households making between approximately $150,000 and $500,000 a year. A family needs to earn more than twice the median income to join the affluent circle, and those in its upper echelon earn seven times the median.

Yet as concerns about inequality have saturated public and academic discourse, the affluent have stayed out of the spotlight. They are not that rich, after all; they are the 99 percent…

But it is misguided to focus all attention solely on the top 1 percent.

Perhaps. But for added perspective, here’s MarketWatch from last month:

The median income for a four-person family was $114,425 in 2022, according to the Census Bureau.

Yet a confluence of data now shows that with the rising costs of housing, child care and healthcare, the typical American family with this income is just getting by, with little cushion for unexpected expenses, savings or planning for the future without making significant compromises…

Being middle-income, in other words, no longer affords a middle-class quality of life in many parts of the U.S.

Sure, $114K isn’t $150K, but that $114K family income is “just getting by.” Are the $150K households really doing so much better that they’ll be able to absorb more of the Boston Review’s suggested “affluent” tax?

The voices calling for this tax on unrealized gains will likely grow louder

As just one illustration, this comes from Forbes:

Ultimately, tax policy must follow the market—that’s where the tax revenue is…

A shift in tax policy towards tapping revenue streams in unrealized gains is almost certainly on the horizon, it is just a matter of degree. 

A tax on unrealized gains will need to be carefully calibrated and accounted for, targeted first towards high-net-worth individuals and liquid assets, to avoid the administrative and political quagmire of valuation and ability-to-pay concerns.

Don’t miss that qualifier – targeted “first” toward high-net-worth individuals. Read between the lines at who’s targeted second.

In the meantime, our government’s debt and fiscal deficit problems are accelerating

And this brings me full circle to earlier in this Digest…

If you want to maintain your current lifestyle, you’d better figure out how to bring in more income, whether from trading with Jonathan or some other means.

Between inflation, our government’s growing fiscal deficit, and the increasing likelihood of taxes on your unrealized gains eventually, the outlook is a tad underwhelming for the buying power of your current income.

Have a good evening,

Jeff Remsburg

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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