Taxing Unrealized Gains Is Unconstitutional: Moore v. United States

Introduction

In recent years we have seen growing political momentum for wealth taxes, the most common of which is a proposal to tax unrealized capital gains. A tax of this nature could have significant negative impact on philanthropy and charitable organizations. Taxing unrealized gains means investors would have to pay taxes on the gains they have not yet received, reducing the amount of money available for charitable giving.

This would lead to a decrease in donations to charitable organizations, hindering their ability to carry out their missions and support those in need. Philanthropists may be discouraged from making charitable donations if they are subject to taxes on unrealized gains, which could have a long-term effect on charitable giving. What’s more, if such taxes are deemed constitutional, this could open the door to additional federal taxes on property, wealth, and possibly even the assets of charitable foundations.

Before the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, shareholders were never taxed on income a corporation reinvested into its business. The TCJA included a Mandatory Repatriation Tax (MRT) which imposes a tax on all post-1986 accumulated foreign earnings, even if they haven’t been distributed. By taxing unrealized gains, the MRT violates the equal apportionment clauses of the Constitution and possibly the due process clause of the 14th Amendment. Over a century of case law has found that a tax on unrealized gains is by no measure or definition a tax on “income.”