Why are taxes on unrealized capital gains considered unconstitutional?

The constitutional issue with taxing unrealized gains comes down to what legally qualifies as "income" under the 16th Amendment. In Commissioner v. Glenshaw Glass, the Supreme Court defined income as "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." The key word there is "realized" - meaning you've actually sold the asset and received money. When you just hold an asset that's increased in value but haven't sold it (unrealized gain), you haven't actually received any money you can spend. You have no cash flow from that asset yet. Additionally, the value could decrease before you sell, meaning you'd potentially be taxed on money you never actually receive. This is why many constitutional scholars argue that taxing unrealized gains goes beyond the 16th Amendment's authority, which only permits taxation of actual income without apportionment among the states.

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This whole debate reminds me of the argument against the original income tax before the 16th Amendment. If you look at Pollock v. Farmers' Loan & Trust Co. from 1895, the Supreme Court actually ruled income taxes unconstitutional before the amendment. I think we're headed for a similar showdown with unrealized gains taxes. The government will try to implement them, someone will sue, and eventually the Supreme Court will have to decide. Looking at the Court's current composition and their typical approaches to constitutional interpretation, I'd bet they'd strike down any attempt to tax pure unrealized gains.

Has anyone actually read the full Glenshaw Glass opinion? I just did and I'm not sure it's as clear-cut as some are making it out to be. The case was really about whether money from punitive damages counted as income, not about unrealized gains specifically. The phrase everyone quotes about "clearly realized" gains was part of a broader definition and might not be the constitutional barrier everyone thinks it is. I'm not saying unrealized gains taxes ARE constitutional - just that this particular case might not be the slam-dunk argument against them that people claim.

Great point about Eisner v. Macomber! That 1920 case is actually more directly on point than Glenshaw Glass for this issue. The Court ruled that a stock dividend wasn't taxable income because it was just a paper increase in value without any actual receipt of money or property that could be "severed" from the capital. The Court specifically said that income requires "the gain derived from capital, from labor, or from both combined" that has been "received or drawn by the recipient" for their separate use. Just holding an appreciated asset doesn't meet this test because you can't actually use that gain - it's still tied up in the original investment. This is why I think any unrealized gains tax would face serious constitutional challenges. The Supreme Court has been pretty consistent over the past century that you need some kind of actual receipt or realization event before something becomes taxable income under the 16th Amendment.