Recent proposals to implement a tax on "unrealized capital gains" bring up several issues.  There is a practical difficulty in assessing such a tax because of the volatility associated with certain assets.  For example, investments in biotechnology companies are notoriously volatile, with huge share price changes over the course of a year.  A hypothetical company's stock price may shoot up in February, pull back 50% by June, increase to 10% above its previous high in October, then collapse by 80% at the end of the year.  When are the unrealized capital gains treated as though they are realized?  What are the mechanisms and the rules for valuing the taxed capital? 

Another consideration is the susceptibility of such a tax to being used to provide patronage to favored constituencies.  It is quite easy to imagine that, for example, rather than providing subsidies for solar panel–purchasers, politicians might provide an "unrealized capital gains tax break" for well-to-do investors in solar panel–manufacturing companies.  The public policy hazards associated with such possible logrolling are easy to imagine. 

Whether intentional or not, it seems that an unrealized capital gains tax would present an outsized peril to one particular class of assets: cryptocurrencies.  The value of Bitcoin, to use the most obvious example, is determined by enthusiasm, speculative bravado, and the collective opinion of whether or not it will hold its value.  There are no projections of future earnings or sales growth or return on equity to provide models of how Bitcoin should be valued.  There is no assessment of management or measures of business efficiency to consider.  For this reason, Bitcoin is extremely sensitive to perception.  Its value changes significantly in response to nothing more than a tweet, as happened in May 2021, when Elon Musk suggested that he had ecological concerns regarding it.  If value is going to be taxed out of Bitcoin every year based on unrealized gains, the store-of-value aspect becomes more tenuous, and the investment appeal dwindles.  Even the hint of these makes Bitcoin less attractive and could crash its price.  Then again, taxing unrealized gains in cryptocurrencies would provide the government with a means to access the appreciation in their value while the exuberance persists, rather than being left with nothing should cryptocurrencies crash.

As with any novel proposal from the government, a tax on unrealized capital gains — or, as some people refer to it, a wealth tax — should be met with sober skepticism until a lot more details are known. 

Image: Gage Skidmore via Flickr, CC BY-SA 2.0.

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