Congress already taxes so-called unrealized gains—and has for decades

Billionaire income tax proposals like those offered by President Biden and Sen. Wyden represent the next logical step for the tax code.

President Joe Biden and Senate Finance Committee Chairman Ron Wyden have each proposed legislation to tax billionaires and other ultra-wealthy individuals on their main source of income: the growing value of their investments in stocks, businesses, real estate and other assets. 

These proposals differ in key ways, but share the same goal of providing a popular, progressive and robust funding source for investments in working families and our communities while ending the scandal of billionaires paying little or no federal income tax. 

The ability of billionaires to dodge taxes under current rules is well documented. According to IRS data reported by ProPublica in 2021, Amazon founder Jeff Bezos paid zero federal income taxes in 2007 and 2011, Elon Musk paid zero in 2018, and Michael Bloomberg in “recent years” paid zero several times. 

Billionaires can reduce and even eliminate their tax bills because most of their income comes not from a paycheck but from increases in their investments. They don’t owe tax on those gains unless they sell the underlying assets (aka “realize” their gains). But billionaires and centimillionaires almost never need to sell their assets to turn those gains into cash income: they just borrow against their fortunes at ultra-low interest rates in a never-ending shell game. Musk’s April 2022 purchase of Twitter, for example, was financed in part by a $12.5 billion margin loan against his Tesla stock, allowing him to use those assets like cash, without actually cashing them in and paying taxes on the sale. (Comedian Trevor Noah highlighted the absurdity of it all.)

Billionaire income tax proposals would end the shocking phenomenon of tax-free billionaires by taxing their income from investment gains every year—just like the rest of us pay taxes on our income every year. 

Opponents have worked hard to make these proposals seem strange and new, like a break from current tax law, but in fact, Congress already taxes many kinds of so-called “unrealized gains” as a way to prevent sophisticated investors from using accounting and investment tricks to disguise their real income—and has for decades. Billionaire income tax proposals like those offered by President Biden and Sen. Wyden represent the next logical step for the tax code.

The following are examples of unrealized income and/or income realized only at the entity level that are currently taxed. 


  •         Income of rich people renouncing their U.S. citizenship: America’s ultra-wealthy—who can live anywhere—sometimes not only leave the country but renounce their U.S. citizenship to avoid U.S. taxes. In order for the IRS to collect tax on all the investment gains they enjoyed while American citizens, these multi-millionaire expatriates are required to pay a one-time “exit tax”: capital-gains taxes are due on the gains (excluding roughly the first $750,000) on all their appreciated assets as if they had been sold, even if they have not been. 
  •         Income from tax avoidance transactions: Beyond buying and selling stocks and bonds, sophisticated investors engage in transactions whose value is derived from the performance of some underlying asset. These “derivatives” include “futures,” which are contracts to buy or sell a commodity or security by a certain date at a fixed price. Savvy investors can manipulate futures to turn a short-term gain (which is taxed at up to 37%) into a long-term gain (taxed at no more than 20%). To prevent that, participants in so-called “regulated futures contracts” are required to treat them as having been sold on the last day of the year even if they weren’t—what’s known as “mark-to-market” taxation. Any gains are taxed (and any losses can be used to reduce taxes) even though the contracts never actually changed hands and the investor raised no cash from a sale. 
  •         Income from certain kinds of bonds: Most bonds pay interest at regular intervals and that interest is taxed each year. Some bonds pay interest in one lump sum when the bond matures: they are originally sold at a discount to their face value and the interest is the difference between the purchase price and the redeemed price. Before the law changed, bondholders only paid tax on bond interest when they collected it—but the bond issuer was allowed to write off a portion of its ultimate interest payment each year. The current rule harmonizes the tax treatment of bond interest: just like bond issuers, bondholders must account for interest annually, paying tax on the imputed amount attributable to each year—even though they have not yet received any cash payments. 
  •         Income from “constructive sales”: It’s possible for sophisticated investors to extract the gain from an investment without actually selling it and triggering capital-gains taxes. These tax avoidance schemes include “selling short against the box” and using derivatives to obtain all the advantages of a sale without actually executing one. Since 1997, tax rules have deemed such techniques “constructive sales” that are as taxable as the real thing. 
  •         Income from passive foreign investment companies (PFICs): American investors in foreign mutual funds and other companies that derive the bulk of their income from passive sources (such as dividends, interest, rent and royalties) can defer paying U.S. tax on that income while running little risk of losing money in the investment. To discourage such tax-avoiding investments in PFICs, the IRS imposes a punishing tax regime on any “excessive” income derived from selling their shares. Taxpayers can avoid that regime by signing up for “mark-to-market” taxation: paying tax each year on the increase in the value of PFIC shares even though they have not been sold and no cash has been raised. 
  •         Income of securities dealers: Dealers in securities like stocks and bonds are distinct from investors because they maintain inventories of such securities for sale to investors like a grocer keeps boxes of cereal on the shelf. Dealers must use the mark-to-market method of taxation, meaning they pay tax on any gains in the value of their inventory even though they haven’t realized the gain through a sale. 


  •         Income of partners in a business: Participants in a partnership like a law firm or doctors’ practice are individually taxed on their share of the partnership’s income even if they have not yet received that share. The reason is that the partnership as a separate entity pays no income tax on its earnings, so it’s left to the partners to do so. Accounting rules ensure the partners are not taxed again on the same income when it is finally distributed.
  •         Income of the shareholders in an S corporation: Shareholders in an S corporation (generally smaller outfits than the more familiar C corporation and with fewer stockholders) are taxed on their share of the corporation’s income even if they have not yet received that share. The reasoning is the same as with partnerships.