But wait, it's worse than that. Even if losses are perfectly accounted for and in a fair manner the idea of taxing unrealized gains sucks for a variety of other reasons.
If a large asset increases in value quickly it can result in a tax liability greater than the owner's ability to pay without selling the asset. So now instead of being able to hold the asset until you're ready to sell, you're forced to sell just to pay off the government. This already happens regularly when inheritance taxes kick in, I guess some people think it should be an annual thing. Of course, forced sales might also depress actual sales value, so you've got that going for you too. Sure, for people with a lot of liquid assets it's not as big a deal, but if someone has invested a lot of money into something, an annual valuation tax could easily force the sale of that asset.
For some assets, government valuation can differ significantly from market valuation. Sure, if all you ever are talking about are stocks and bonds there might be an easy way to determine value, but not everything can be so easily valued. Think about shares in a small business, or land, or some sort of collectable asset.
Paying taxes annually on an asset means that all increases are being paid based on the value of the asset at the time of the increase and made using funds at full inflation. You get to pay your taxes using uninflated or partially inflated currency, but at the time of sale of the asset you only realize fully inflated currency. As an example, if I bought an asset in 2019 for $100,000, if its actual value didn't change it would now be worth $122,231 based on inflation alone. If I sold that asset in 2023 I'd realize a total of $22,231 in inflated "gains" on which I'd have to pay taxes using that inflated money. Still a net loss, but it is what it is.
This scheme instead requires me to pay taxes on $3,481 of unrealized gains in 2020, then another $7,281 in 2021, then another $7,149 in 2022, then another $4,320 in 2023.
bUt iT iS ThE sAmE!
No. Adjusting for inflation, 2020's effective payment is based on $4,150 in today's money. 2021's payment is based on $8,564. 2022's payment is on $11,632. Plus $4,320 in 2023. So the eventual taxed value in inflation adjusted terms would end up being $28,668 - 129% of the actual increase in value at the sale. That's just looking an investment you held for the last four years. If someone holds an investment for a few of the wrong decades it could easily be much more drastic than that.