Now the question is whether a tax on unrealized capital gains can become law in a spending bill that can’t afford any Democratic defectors.

Some influential lawmakers, including Rep. Richard Neal, chairman of the House of Representatives’ Ways and Means Committee, were already raising eyebrows on the proposal ahead of Wednesday’s details.

The tax would apply to households that have at least $1 billion in assets, or three straight years of income over $100 million, Wyden’s announcement said. Approximately 700 taxpayers will be subject to the tax, which will raise ” hundreds of billions of dollars,” a bill summary said.

Some initial reactions were cool from the select few people who would be conceivably subject to the tax. On Tuesday, Ray Dalio, the co-chairman and co-CIO of Bridgewater Associates, and other members of a deep-pocketed panel were asked if they backed the idea of paying more taxes.

Dalio said he would “support anything into that is going to have the effect of being spent on increasing creating equal opportunity and greater productivity,” he said — but he’s “not sure” the extra tax revenue would accomplish those goals.

Dalio is worth $20 billion, according to Forbes.

Here’s what we know about the proposed “billionaires’ income tax”:

The billionaires’ tax isn’t a wealth tax, Yellen says

Under current tax rules, an event like an asset’s sale — or, in tax-speak, a “realization” — is the time when the Internal Revenue Service swoops in to assess a capital gains tax on a rich person’s portfolio.

That means large sums of wealth, like publicly-traded securities or privately-held businesses, might be gaining value and going untaxed because the owners can afford to sit on them and let the money grow.

Wyden says that’s set up “two tax codes in America.” There’s the first code where workers automatically pay taxes through their paycheck withholdings. “The second is voluntary for billionaires who defer paying taxes for years, if not indefinitely,” Wyden said.

Treasury Secretary Janet Yellen said Sunday on CNN the proposal “would impose a tax on unrealized capital gains on liquid assets held by extremely wealthy individuals, billionaires.”

“I wouldn’t call that a wealth tax, but it would help get at capital gains, which are an extraordinarily large part of the incomes of the wealthiest individuals,” she added.

‘Mark-to-market approach’

The proposal would calculate the fair market value of the paper gains for tradable covered assets at the end of the tax year.

A tradable covered asset, like a stock, is defined as “any covered asset if interests in such asset are traded on an established securities market, are readily tradable on a secondary market, or available on an online or electronic platform that regularly matches, or facilitates the matching of, buyers and sellers of such assets.

A derivative on a tradable covered asset also counts as a covered asset, according to the section-by-section explainer of the proposal.

Calculating the value of a hypothetical sale at a fixed point in time is a so-called “mark-to-market” approach, explained Howard Gleckman, senior fellow at the Tax Policy Center. “You’re marking the value of the asset to the market,” he said.

Suppose a hypothetical stock has a $100 market value on Jan. 1 and ends at $130 on Dec. 31. The tax would be based on the $30 rise, Gleckman said.

The top federal capital gains rate is now 20%. The Net Investment Income Tax adds another 3.8% for high-earners .

Corporate equities generate 40% of the wealth that flows to the top 0.01% of America’s households, according to recent research. But with the so-called “buy, borrow, die” strategy, the super-rich can get loans against the paper gains in their portfolios and then pass on the appreciated assets.

The existing “step-up-in-basis” provisions help inheritors by resetting the “cost basis” to when they receive the asset, and that can greatly shrink the tax bill if there’s ever a future sale.

Under Wyden’s proposal “the first time billionaires’ tradable assets are marked-to-market, they may elect to pay the resulting tax over five years.”

These taxpayers could also decide to treat a maximum of $1 billion in tradable stock from one company as a “nontradable asset.” Wyden’s proposal says that helps ensure the person has the cash on hand and financial liquidity so as not to affect the ability of a successful company found to keep their controlling interest.

But what about a billionaire’s private assets?

All kinds of assets growing in value can be subject to capital gains tax if there’s a sale. But how can the taxman determine what the value at a set point in time may be if there’s no sale to take into consideration?

With publicly-traded stocks, “doing that calculation is very simple,” Gleckman said. “Where this really matter is a privately held business … The valuation problem is the big problem,” he later added.

Here’s what the Wyden plan says about that: The growing value in non-tradable assets like real estate or a stake in a privately-held business would not get taxed yearly. Instead, whenever a sale occurs, the owner will pay capital gains tax and an interest charge that’s dubbed a “deferral recapture amount.”

This interest charge represents “the amount of interest that would be due on tax owed if the asset had been marked to market each year and the tax had been deferred until sale,” Wyden’s office said. (The rate is the federal short-term rate, plus a point. That means the rate that could hypothetically apply in the current context is 1.22%.)

The total tax on a non-tradable covered asset, including the interest charges, could not go past 49%, Wyden’s proposal said.

The question of which assets are subject to this annual taxation is a major one — in addition to how the rule will treat capital losses in a given year, according to Garrett Watson, senior policy analyst at the Tax Foundation, speaking Monday.

Wyden’s proposal says the affected billionaires could take deductions for losses. It also says there can be instances where taxpayers can carry back losses for up to three years.

Wyden’s proposal notes that taxpayers themselves aren’t the only ones potentially on the hook. Certain types of trusts may also have extra tax bills to pay. Millions of leaked documents recently showed how the elite essentially park their riches in trusts — often in states like South Dakota, which has no state income tax and says trusts can exist in perpetuity.

Wyden’s proposal says trusts, with some exceptions for entities like charitable trusts, would be viewed as applicable taxpayers if the trust has at least $10 million in income, or $100 million in assets for three consecutive years.

Is a billionaires’ tax doable?

Pretty much every country in the developed world taxes capital gains — following the time of sale, said Watson, noting there’s a narrow exception in the Netherlands.

To be clear, Wyden has been talking for a long time about levying yearly taxes on unrealized gains. For example, back in 2019, his office put out a proposal on unrealized gains.

“It’s an untested idea,” Watson said. “There’s a lot of risk in terms of design and concept,” he said.

In America, broker-dealer companies already have to do this kind of accounting when they evaluate the value of their inventory when they pay their taxes, Gleckman said. But “for individuals, it’s a very new regime and it’s going to raise a lot of questions,” he added in an interview on Monday.

“It’s not impossible to do, but it’s hard to do this,” he said.

In the current tax-hike debate, the uproar over Democrats’ proposal to make banks report cash flow information above a certain amount (first $600 and now $10,000) to the IRS shows the feasibility of tax ideas can get people fired up.

One line of argument for critics of the bank account monitoring proposal is that it would unnecessarily rope in regular taxpayers and put an administrative burden on financial firms. Sen. Joe Manchin, a Democrat from West Virginia, on Tuesday called that proposal “screwed up.”

But the mark-to-market approach is an easy lift under the circumstances, said David Gamage, a professor at Indiana University’s Maurer School of Law who specializes in tax policy and has previously met with Wyden’s office.

If lawmakers wanted this approach for a larger set of taxpayers, that would be a “giant administrative burden for the IRS,” he said on Monday. But if the rules just apply to the small sliver of billionaires, that’s “very minor in the scheme of things.”

Gamage, an Obama-era special counsel to the Treasury Department’s Office of Tax Policy from 2010 to 2012, is awaiting specifics. But in his view, “they are picking the easiest version of this reform.”

Others, however, have their doubts. Neal, the chairman of the Ways and Means Committee, has said the brass tacks of Wyden’s unrealized gains proposal “will be a challenge.”

The Ways and Means Committee has its own tax plan, which includes a 3% surtax on households making at least $5 million. “Our plan looks better every day,” he said, according to the Associated Press.

This story was updated on Oct. 27, 2021.