End the Tax on Phantom Gains
Imagine that in January 2021 you bought 100 shares of a company at $100 per share. Since then, the consumer price index, one of the standard measures of inflation, has risen by 11.74 percent. Coincidentally, the stock price has kept pace with the inflation rate, rising from $100 to $111.74. Your shares are now worth $11,174. Their value, adjusted for inflation, has stayed the same.
But the IRS doesn’t see it that way. If you sell today, you will get a capital gain of $1,174. The federal government will tax you on that whole gain. If you’re in the 15 percent bracket for capital gains income, you will pay $176 in capital gains taxes.
So you paid $176 on a phantom gain, which means that you lost money.
Whatever you think of capital gains taxes, basic fairness dictates that people who get capital gains should be taxed on the real gains, not the phantom gains.
This is from David R. Henderson, “End the Tax on Phantom Gains,” Institute for Policy Innovation, June 22, 2022.