The real risks of taxing unrealised gains

Summary: The article captures diverse reader reactions to our Editor’s Note on the topic of Netherlands’ proposal to tax unrealised gains. Their responses highlight concerns like liquidity risk, asymmetric loss treatment to loss of capital.

Our Editor’s Note titled “Paper gains, very real taxes” set off a thoughtful and layered discussion among readers. The topic of the note was the Netherlands push for taxing unrealised gains.

We argued that taxing gains before they are realised undermines a foundational principle of capital market taxation: you pay when you actually make money, not when your brokerage statement merely says you have. Our take was that such a move could create liquidity stress and distort investor behaviour. And historically, it has proven to be a bad idea, take, for instance, the taxation policy in India during the 70s.

The responses that followed did not merely echo agreement. They revealed a spectrum of reactions to this global development. Taken together, they force us to ask the question: where to draw the line between tax fairness and economic reality?

Liquidity without income

Several readers focused on what they see as the central flaw: a mismatch between tax liability and cash flow.

“Taxes will be charged on capital gains immediately but losses can only be carried forward… Loss relief is asymmetric. It also poses serious liquidity risk… Wealthy investors may migrate to more attractive geographies.”
– Priyanjan Das

The concern is structural. If gains are taxed annually but losses are not refunded symmetrically, the system embeds distortion. More critically, it creates a liability without liquidity. An investor may owe tax despite not having sold anything – despite not having generated real cash.

The likely response, as suggested, is either forced selling or capital relocation.

Why keep gains unrealised?

Not all responses rejected the proposal outright. Some questioned the premise.

“This tax on unrealised gain does add time variable to the equation of assets… Could you please give an example that helps me understand why the investment has to be in unrealised state?”
– Sachin

This shifts the debate from emotion to definition. Why should the timing of a sale determine taxability? If assets are valued annually, why not tax annual increases?

The distinction lies in reversibility. Interest accrual increases a contractual claim. Market appreciation does not. A share priced at €130 today may fall to €95 next year. Taxing interim highs converts volatility into taxable income.

Sachin’s related concern about hiding digital assets adds a behavioural dimension: when taxation appears disconnected from economic substance, avoidance incentives strengthen.

The fairness pressure

Some readers acknowledged the political pull behind such policies.

“Apparently the super-wealthy… end up paying near zero taxes… Politicians will be able to exploit and find a balance through steps like that in the Netherlands… A balanced approach is the need of the hour.”
– Surendra Prasad

This perspective recognises legitimacy pressures. If visible wealth appears lightly taxed, governments face public demand to respond. Taxing unrealised gains becomes tempting – not necessarily because it is economically sound, but because it appears equitable.

The tension here is between the perception of fairness and design efficiency.

Versions already exist

Sunil Kothare introduced nuance by pointing out parallels.

“The US has a similar regime… under the PFIC rules… In India, capital gains taxation based on stamp duty value sometimes leads to similar situations of tax on notional gains.”
– Sunil Kothare

This suggests the debate is not binary. Tax systems already contain elements that reference notional values, often as anti-avoidance tools. The concern is how far such logic extends – and whether incremental exceptions gradually redefine the principle itself.

Tax differently, not earlier

Some readers rejected unrealised taxation but proposed alternatives.

“I am against tax on unrealised gains. But the govt can still tax them in indirect ways… Higher GST slabs on luxury consumption… Higher STT on volumes… Keep LTCG low.”
– S. Raju

This approach preserves realisation-based taxation while pursuing redistribution through consumption or transaction channels. It reframes the issue: progressivity need not require redefining income.

Is this already happening?

A practical challenge came from a retiree’s lens.

“My FD interests… are automatically taxed irrespective of withdrawal… Isn’t this already prevalent?”
– Sujit K. Mukherjee

Interest income is taxed annually, even if reinvested. Why treat capital gains differently?

The difference lies in certainty. Interest accrual represents an enforceable increase in cash claim. Equity valuations fluctuate. Yet the question forces clarity: where does income end and valuation begin?

A widening tax net

The debate also expanded beyond unrealised gains.

“Even NRIs living in the US are now required to declare and pay taxes on their holdings in India.”
– Ajay Gupta

Cross-border reporting and disclosure rules are broadening the reach of taxation globally. The direction is toward more visibility. The open question is whether expanded reach will remain aligned with economic substance.

Credits

Priyanjan Das
Sachin
Surendra Prasad
Sunil Kothare
S. Raju
Sujit K. Mukherjee
Ajay Gupta

Also read: Hype, déjà vu and smashed keyboards

This article was originally published on February 24, 2026.