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I'm Steve Campbell, your chief brand officer at Seed planting Group.

Travis, the co host of Ditch the Suits, serves as our CEO at Seed.

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And this is going to be episode two in a whole series that we've been talking about income taxes and the effect on you and what's being proposed.

So if you missed the last episode, I think it'd be good to go back and listen to the impact of raising taxes on corporations and how that impacts you.

But in this episode today, we want to talk about the nightmare of taxing unrealized capital gains.

So what happens when that happens?

So, Travis, kind of tee us up for this conversation today and where it's going to lead us.

Yeah, this is going to be a heavy drop the bomb type of episode.

This is boom.

This is a very important episode.

I talked to my friends, I talked to my neighbors, I talked to clients about this all the time.

And people really don't understand what all this means.

This is really a two part episode.

We're not going to get through the whole conversation today.

So I think our solution that we normally try to provide at the end is going to end up in next episode.

But you're definitely going to want to hit this episode first so that you set up the next episode because this is a big topic.

We probably could have made this whole topic just by itself, five different series.

But what I've tried to do is pare down to kind of like what you need to know about it type of thing.

You know, when we think about financial.

Or the factors that impact our financial health, a lot of times we're thinking about income taxes.

Income taxes are going to be a big part of that.

And it's not just the income taxes we talked about in the last episode.

It's the income taxes that you pay.

It's income taxes your heirs are going to pay someday.

It's the income taxes that other people pay.

If you don't think about other people, you're making a mistake because you can.

Only hide in your house for so.

Long before somebody comes knocking.

We have to be aware that even.

Though, you know, other people may be.

Paying certain taxes, that's still going to.

Impact us in some way.

You know, it's kind of like the butterfly effect.

There's nothing that doesn't have kind of unintended consequences or sometimes intended consequences, but they're going to be consequences of taxes.

Regardless of who's paying them.

And then, of course, we've talked about the rural corporations in the system.

That that was the last episode.

This episode is going to be very different.

We're not really talking about corporations, although it's because of corporations that a lot of times people are going to end up in this situation, but we're going to shift more to the individual kind of the person or the household.

So the listener that's sitting at home thinking about their own finances or thinking about their family's finances or their future inheritances or how to set up their kids, this is now directly for you, about you and the impact of things that can happen to you.

Now, when we talk about unrealized capital gains, I know that the number that has been thrown out there is $100 million.

So it's for people with over $100 million.

Do not tune out, though, because I'm.

Going to show you how this kind of comes back down to you regardless of really how much money you have and kind of where some of this stuff can go.

And I just think that's important.

Other people, though, I've seen online, are saying, oh, they're going to tax capital gains and they're implying they're going to tax it on everybody.

And one of the reasons why they're implying they're going to tax capital, well, what's called unrealized capital gains, which we'll get to on everybody, is, I think it's a scare tactic.

And the idea is that.

Normally if.

The government creates a tax on one group of people, it trickles down to everybody, right.

Eventually they'll be like, oh, like income taxes were originally created for the top 1% of the country.

Now everybody is subject to income taxes.

Doesn't mean you have to pay them because you might be at an income threshold where you don't qualify, but everybody basically is going to be triggering a calculation to see if they owe income taxes versus it used to be just for a very elite group.

So the argument is like, well, if I start taxing wealthier people more, eventually it's going to come down and get everybody.

I don't think that that's the case.

I think it's more we need to.

Think about what are the unintended consequences of people being exposed to unrealized capital gains taxes and what that's going to do to not only them, but to us, the people around those people, right.

The people who live in the communities where those people own assets and the stock market and how that's going to be impacted from all this stuff.

So I think it's a broader discussion and I don't think people should dismiss it.

And I also don't think people should buy into some of the fear mongering.

I think we really want a very balanced understanding of this so that we can better articulate it when people are talking about it, when we're thinking about it, if it's going to impact us and what we should do if these things start to pick up some steam.

Well, and one of the things that you had talked about is the last episode was all about corporations.

But by the end of the show, we showed you what happens to them is going to affect you.

Same thing you say $100 million and somebody might say, that's not me, if you'll stick with us long enough.

There is a lot of financial education in this because in this episode we're going to discuss what unrealized capital gains are.

That would be good for you to know how do you actually get them and what are some of the challenges with the concept from a practical application standpoint.

So even if you're not in this threshold and have this amount of money, it's good to still understand kind of how these key terms work.

So I think it's going to be a really thoughtful discussion.

And again, part one of two.

So we're going to kind of lay the groundwork in this first one and then kind of move into the second one.

Let's take a break to hear a word from our sponsor.

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Yeah, and that's great.

And then the second one, just to do a little bit of foreshadowing, we're going to actually cover how the tax could have a dramatic negative effect on your personal financial well being if you're not the person paying the taxes.

We're just kind of setting this up and we're going to build up to it.

But.

So, so let's start at the beginning.

Unrealized capital gains, what it actually is.

Because I'm sure we've already lost some people.

Like, what is this?

So, yeah, so define it for us.

If you understand what a capital gain is, we're going to put the term unrealized in front of it.

And for those that don't understand what a capital gain is, a capital gain is when you buy something and it goes up and the price goes up and you sell it for more than you bought it for.

So you buy something for 100 and you sell it for 150.

You have a capital game of 50.

Now, once you sell it and that fifties in your hand, you now have use of that money.

So once you have use of that money, you now have to pay, or you have to pass that gain through your income taxes.

Whether or not you have to pay taxes on, it's going to depend on your situation.

But that 50 becomes taxable.

That $50 gain, 150 -100 an unrealized capital gain is when you have the situation where you bought something for 100 and the price goes up.

It's now worth 150, but you don't sell it.

You say, that's nice, it's 150, but for whatever reason, I'm not going to sell it.

Maybe I'm going to keep it because I think it's going to go up more.

Maybe I don't sell it because there's no buyer or whatever.

Whatever reason you don't sell.

Think about a house.

You bought a house, the house that you live in, for $300,000, and because of the real estate market, you can now sell for 450.

Does that mean you should run out and sell it for a lot of people?

No, because then where would you live?

So you keep it.

So the unrealized capital gain is the what if I sold it today, even though I'm not going to, what would my gain be?

That would be taxable.

So it's the what if scenario for today.

It represents today what you think you could sell something for.

Because, like, let's take the example of real estate.

Do you actually know what you can sell your house for?

You don't.

Until you sell it right.

You could find out the value.

You could say, well, the value is really 500,000.

Because I had it appraised doesn't mean you could sell for 500,000.

Do you want to pay taxes?

Let's say that you did that.

If the value is 500, but you only sell for 400, do you want to have paid taxes for the 500 or for the 400?

You want to pay taxes for the money that you actually got in your hand, that you can use, and you probably don't have money to pay the taxes until the money actually gets to your hand in the first place.

Businesses are exactly the same.

Corporations, small businesses, especially, you know, mom.

And pop shops and that stuff.

The value, it can be very, very broad as to what that could actually be worth in the real world.

So somebody might say, well, that restaurant is probably worth $3 million to the right buyer, but to most buyers, it might be worth 2 million.

To somebody, it might be worth 5 million.

If there's recession or if there's Covid, it might be worth 50,000.

So it's really just going to depend on what's going on and how much of that is because of the building and the location, how much is the restaurant and those types of things.

So we want to be really, really, we just want to understand what unrealized capital gains are, how you get them.

You can get them on your real estate.

You can get them on your investments.

You can get them on small businesses.

If you own fidelity, fidelity is privately owned.

If you own fidelity, you have unrealized capital gains.

Whatever you've got into it and whatever it's worth today, if it was sold to, let's say, JP Morgan, the difference is taxes.

But if you don't sell it to JP Morgan, that difference, what they're actually talking about is they want to tax the difference.

I think it's good to, to lay the difference between people have qualified accounts and they have non qualified accounts, right?

So you have your iras, your Roth accounts, your 401 ks, and then you have brokerage accounts.

So when you talk about investments, if you go pull up your statement today online, if you bought a stock like Apple or Microsoft, you're going to have what you originally bought it for as your cost basis.

And then even if you're holding it today, how it's grown over the years, you're going to see that unrealized capital gain difference on there.

But it's different when you look at qualified versus non qualified.

So talk to us to help people understand kind of how that works.

Yeah.

So qualified is you've got some kind.

Of deal with the IR's, so you don't have to pay taxes right now.

So an IRA, you've got a deal that you'll pay taxes when you take it out.

A Roth, you've got a deal that you pay taxes upfront, so you're not going to pay taxes on the money you make.

So, for you, when you have capital.

Gains, even if you sell an investment and realize the capital gain, you don't pay taxes on it until the money comes out.

Or if it's in a Roth, you never pay taxes on it unless you take it out before 59 and a half.

A non qualified account is a brokerage account, just an investment account.

Doesn't have any deal with the IR's.

So everything you make in there as you realize it, so as you receive it.

And that's the important part, because your investment goes up in value on your statement.

You haven't received it yet.

You haven't gotten cash yet for that.

People look at their investment statements and they think that that represents how many dollars they have.

You don't have that many dollars unless the money is sitting in cash.

What you have is shares that could sell for those prices on the market.

That instance that that statement was run, it's not money yet.

When it becomes money, then it becomes taxable, because now you can use it for something else.

If you own a share of apple, it's just a share of Apple.

You can't do anything with it until it turns back into cash.

Once it's cash, you can do something with it.

So if you made money turning Apple into cash, or going from cash to Apple, and then Apple back to cash, if you make money in that process, once you get the cash back in your hand, now you owe the taxes.

Now, in an IrA or a Roth, you know, different rules.

However, this tax that they're talking about, where it would apply to people with over $100 million, it doesn't matter where the money is.

It doesn't matter if they've got a tax deal or not.

What they're saying is we're going to add up everything you got at the end of the year, and if it's over $100 million, you're going to pay taxes on any of the games.

Now, people with that much money normally.

Don'T have that much in IRas.

And Roth, that's normally something that they own outside of a tax qualified account, because it's hard to get that much money into one of those types of accounts.

You could theoretically, like, you know, if.

You bought apple when it was, when.

It first came out and you bought it in Ira, you could theoretically have tons and tons and tons of money in there.

But most of the people, when they.

Have that level of money, it's outside of a retirement account.

It's nothing.

Retirement account.

Well, and I think that's a really good example to help people understand because they may not have realized that either.

You know, if you have a brokerage account, you invested $10,000, and 25 years later it's now worth a million dollars or half a million dollars, but you've never sold it and received it.

Then you have unrealized capital gains.

And that's a concern for a lot of people in tax planning, which is like, how do I get out of concentrated positions without, you know, realizing a huge tax hit?

So what we're talking about is, you know, potential proposals that may want to come after that unrealized part that you've never sold.

So you've been afraid if I sell this, I'm going to get a huge tax hit.

Kind of.

What's being suggested is what if, you know, higher thresholds, obviously, but for conceptual purposes, taxing that amount that has gone up that you've never sold on.

And what you just said was perfect because it opens up.

If I were to rephrase that, it's a terrifying statement.

Most people that we work with do not like paying capital gains on their investments because it's a big check they have to write.

You know, like if you sit, go.

And you sell a million dollars with.

A whole bunch of capital gains, you might write a $200,000 check to the IR's that cover the taxes due on.

That, you know, or even more so.

Most people don't like that.

Could you imagine?

You didn't sell anything.

You didn't do a thing.

All you did, you were hanging out, you went to the beach, you're drinking a pina colada.

The end of the year comes and boom, you get a tax bill now because your investments went up in price.

You didn't sell a single thing, and yet you still get that same $200,000 tax bill.

You didn't do anything.

You didn't.

You didn't get rid of it.

Now you have to pay a $200,000 tax bill, but you don't have the cash.

The cash doesn't exist yet because it's still in stock.

So you now have to say, okay, now I'm going to sell that stuff so that I can pay the taxes, you're forced to sell something and pay a tax.

So it's interesting because a lot of people are proponents for this, are like, well, but it's only people over 100 million.

But put yourself in that situation, even in your own position, how would you do it?

Now we're talking about 200,000.

What if it was 200 million or 20 million?

You know, was the tax bill all of a sudden, that's a real number.

And it's like, wow.

But I don't want to get ahead of ourselves because there's some challenges from just a practical application.

So before we even talk about the impact of the tax, let's talk about, this is a novel tax idea.

It's never been done anywhere in the world.

I think I've heard of it prior to kind of the current administration and some of the kind of the policymakers that are running for election kind of throwing it out there.

Prior to that, I've only ever heard of it coming from, like, California.

I've heard it mentioned in different political.

Kind of spheres in California, of course, California being extremely broke and having major deficits, obviously looking for more ways to tax.

So they come up with this.

We're going to tax the super wealthy because they can afford it.

Another reason why you would say that is because if only 1% or less than 1% have that kind of money, then it's really easy for the majority of the remaining 99% to say, yeah, they're fine.

They can pay that bill without understanding how it works.

So it becomes kind of like this political thing, but we don't understand how it works.

But from a practical standpoint, let's say that it happens and we say, okay, we're going to tax unrealized capital gains.

We're going to tax money you don't have.

This is kind of Steve like you.

Your son graduates from college and gets a degree as a civil engineer.

The government comes in and tabulates how much money he should make for the rest of his life as a civil engineer and says, here's the tax bill for that right now on day one of his new job.

That's unrealized capital gains because it's your son's earning potential.

It's how much he could have in the future if he does certain things.

And so it'd be like accelerating that tax bill.

Say, give it to me right now.

Well, what happens if he changes career.

And works for a nonprofit or becomes.

A stay at home dad someday?

You know, he's not going to get that income.

But I already pay taxes on it.

What, how do you reconcile that?

But there's an issue with the accepted methodology for how do you come up with the value in the first place?

So when you look at the stock market and you say, well, it's easy, you go to the stock market, and the stock market tells you what Apple's worth today.

No, it doesn't tell you what Apple's worth today.

It tells you what the price is today.

If you're going to tax somebody on their assets, you're going to have to tax based on what the real value of the asset is.

So somebody's going to have to come.

Up with the real value.

And maybe for stock market type of investments, you could say, we're going to use a stock market.

What do you do for companies that aren't in the stock market and most people who have over $100 million of.

Companies that aren't in the stock market.

Where you come up with the price, somebody comes in and has to appraise it, and they're going to come up with a real value, not some arbitrary.

Price that's getting kicked around in the stock market because it's a good day.

Or a bad day.

So are you going to have different, you know, different ways to calculate the value of things?

If you jump over and you're doing an appraisal of somebody's private assets, that's a complete, that's a very invasive thing.

But also, what's the accepted methodology?

When you appraise a business, it's a little bit different than a house.

There's very few businesses that are similar to other businesses.

So how do you actually come up with, what are the standards for coming up with evaluation and how do you agree on that?

Even, even if you bought a house, let's say you were trying to refinance your house and you get an appraisal that comes back low.

So you get another appraisal and it comes back high.

What's the bank going to say?

Get a third one to basically arbitrate the high and the low one.

So you do evaluation of your business to figure out if you're going to.

Have to pay unrealized capital gains, to.

See if you're in a threshold where you'd have to pay taxes and your valuation comes in low, who's to say that was the right valuation?

What if the government comes in high?

Who's to say that's the right valuation?

So now you're going to sue the government every year over your valuation?

Like I said, it's a lot different than a house where a house, you can go and you can take the square footage and you can compare it to other houses in the neighborhood.

And even a house, you can't get an appraisal for a house if it's unique in the neighborhood.

Like if there's no log cabins in the neighborhood.

It's hard to appraise a log cabin.

If there's only one, because there's nothing else to compare it to.

So we have an issue with the valuation methodology.

And then even between different types of assets, how would you settle on what the right methodology is?

How do you handle challenges?

But the cost of it, the cost of valuing a business is very expensive.

There's a lot of accounting, there's a lot of consulting work on it.

And it takes a while.

It can take 3612 months to value a business.

So what you're really talking about is now saying into a business, January 1, you need to start your valuation for the year.

You need to pay for that.

It's going to drive the cost of it up because there's not enough appraisers.

And not only that, but we're going to come at you because the IR's does this for just about everything.

If we don't like the way that you came up with your numbers, we're going to challenge you on that.

And that's going to cost you money.

In an area that's a non exact science.

There's no fixed way to do evaluation.

I mean, there are standards, but there's not.

The way that you weight things is kind of like beauty and the eye of the beholder.

It's more of a case by case scenario.

Would you require it to be done annually?

Who has the liability?

So you do an appraisal in the best interest.

You know, you do the best job that you can.

The government doesn't like it.

Are they going to penalize you and fine you on it?

You certainly would have in this case, this unrealized capital gains are talking about people with over $100 million of assets.

You would have an incentive to undervalue your properties, or you'd have an incentive not to improve your properties.

Or you'd have an incentive to get rid of things or make things very hard to value.

You'd have an incentive.

Okay, I'm right at 99 million.

So what?

They're going to come in and audit you and find out some reason to bring you over 100 million so they can put a 25% unrealized capital gains tax on you.

That that's an unfair incentive.

If I'm off by a million dollars and you can come up with some way to arbitrate that, you know, we cut some corners someplace, and we made a 1% error, and you can get me over that 1% error.

You get $25 million or 20 million or 10 million or whatever.

That's an unfair.

I mean, like.

Like, I don't even know how you could.

You want to believe everybody does things with the best interest at heart, but.

Come on, you know, that's.

You're just asking for complete destruction.

The other thing is, is that private businesses are private.

You wouldn't want somebody coming through your house every year.

What if you have a small business?

Do you want somebody really coming through?

And every year you've got to basically undress in front of them your business, your real eState.

Because when they're talking about people over a hundred million, they're talking about everything that they own, tons and tons of things, and then things that they own where they're only a passive investor.

But now that's gonna pull, and you could own a business.

Let's say you want to start a business and you need a backer.

So, Steve, I'm gonna start a business.

You got a bunch of money.

You got $100 million.

And I come to you, I say, steve, will you loan me some money so that I can start this business?

And in return, I'm going to give you 10% of the business.

You go, yeah, man, that's awesome.

Here's some money.

I get 10% of business.

You know what has to happen now?

Because you own 10% of my business.

Because you gave me it.

You gave me some money.

My business now has to be appraised every single year.

Somebody's going to go through all of my cabinets.

Basically, they're going to undress me because you are required to have a valuation so that you can prove how much taxes you owe to the IR's on money you don't even have yet.

Hey, guys.

Steve Campbell with digital suits.

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So let's get right back to the episode, and thanks for listening to ditch the Suits podcast.

As you've been talking, you left our last episode with a statement at the end that says when you talk about corporations having their taxes raised, corporations are not the reason we have a debt problem in the US.

It's irresponsible spending by the us government that for a lot of people would look at our deficit and kick in the can down the road and the amount of money that we're spending, that when you are talking about some of these areas, for 99% of people, it's very hard for them to imagine the amount of assets you're talking about.

So because they're not emotionally in it, it's like, yeah, that all sounds good, good.

But when you actually start to talk about the ethics of it and the government coming after people that have this amount of money, the idea of them being fair, if the whole idea is that people over a threshold are going to add revenue to a government, then it's very hard to say, well, of course they're going to come in with eyes wide open and turn a blind eye if someone's close enough.

Some of the judgment calls and the unfairness, if there's the ability through auditing or valuations knowing who's right.

Pretty eye opening when you actually, from a very practical standpoint, think about like how this would work, because there may be incentive on one side to get what they can, if that is the ultimate goal, is to raise revenues.

And so I think there's a couple of points here, but that's what I've been thinking about.

I'm not saying it's right or wrong or it's going to happen because we don't know, but you can at least raise the level of concern and say, how do you make sure that this is actually going to be a fair operation?

Because you could see a lot of gray areas or misuse or abuse coming from a situation like this.

Well, and also think about, think about your own self.

If you ever watch your portfolio, you.

Have good quarters and bad quarters, right from statement to statement.

Sometimes it's up and sometimes it's down.

And we've all, most people can remember 2022.

Now you can remember Covid, maybe you can't remember back to 2008, but there's.

Been bad years and good years.

Imagine from October to December, the stock market goes up by 10%, or your net worth.

The things that you own, they all appreciate by 10%.

And so you go and you look at your taxes and because it's gone up by 10%, you are now going.

To owe income taxes or capital gains taxes.

You haven't cashed it out, you haven't.

Taken the money yet.

You can't use the money yet, but you could.

It is true that theoretically, somebody would pay you the price, you know, or the value.

XYZ, it's up by 10%.

Then January, February, and March has a recession and the market goes down 20%.

The value of your investments go down 20%.

You're paying taxes that three months ago on assets that went up by 10%.

That are now down by 20%.

You are now forced to go sell those assets that you never cashed out.

Because you didn't need to.

Right.

Pretend it's a building or, you know, your apple stock or whatever.

So you never.

You never sold it.

It was up 10%.

You have a recession.

Everything comes down.

You are now forced to sell it.

A 20% loss, you know, from.

From the high.

So you might still have a gain, but 20, you're paying taxes on something that was worth essentially 20% more three months ago than it's worth now.

It makes no sense.

Now, if you had sold it and you got that cash, the cash is in your pocket.

Okay, I can pay taxes on it because cash is in my pocket.

But I didn't sell it.

I left it in its form.

Now you're telling me you're going to tax it as if I sold it.

But it's.

No, it's not there anymore.

Right?

It's got you.

So.

So this gets to something like that's called constructed receipt.

It's like I don't have control of the cash.

Just because you put on a piece of paper what you think something is worth or what you think you can sell something for doesn't make it real.

It only becomes real when you get the money in your hand.

This is when people say, hey, when my investments are done, I leave them.

Because why?

It's just a paper loss.

It doesn't matter.

And the reason it doesn't matter is because you didn't make it real.

You didn't trade your stock or your building for a pile of cash.

Once you trade the stock or the building for a pile of cash, it's real.

That's what you have to work with.

But until then, it's all theoretical.

The pile of cash.

Theoretical.

What they're talking about doing is taking that theoretical pile of cash that you could get and taxing you on it just.

Just because.

And that's where this starts to all kind of like, just get a little.

Bit bonkers, if you ask me.

Yeah.

I don't know too many people that when you file your taxes, if your tax preparer calls you and says, hey, we owe more because of XYZ.

And it catches you off guard.

You'd be like, hey, like, I don't want to pay that.

You get mad.

And that could be a $1000 bill for something that you didn't know, that.

You didn't approve over $300.

So imagine 300, 5200 million, you know what I mean?

It just puts in a context that I think we can wanna do the right thing and understand how things work.

But until you really peel back the onion and you start to ask questions, and that's the whole point of it.

And we always like to leave every episode with a solution.

But the problem is that before we even get into a solution on this topic, we need to actually dig into what could likely happen if this tax was actually implemented.

So we got a couple more episodes of this series talking about income taxes and proposed tax laws that may be coming down the road.

You need to understand how these mechanics work because it ultimately will impact your money and life.

Whole point of this show.

Leave us a comment.

Let us know.

Did you understand this?

Did you know this?

How it works?

Did it raise curiosity?

We'd love to give you resources and links.

Travis and I would love to get in contact with, with you.

We appreciate you joining us in this journey.

So smash that like, button.

Subscribe, follow along with us.

Remember, this is a two parter, so a little bit different.

We normally like to give you a solution.

We got a part two that you're not going to want to miss because it's really going to help you understand if this tax was implemented.

What does that actually mean?

So, as always, thanks for being our guest on digital Suits podcast.