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Notes -
Theory — the new unrealized capital gain tax is designed (or will have the effect of) forcing people like Elon Musk to surrender control of corporations resulting in PMC control instead of founder control.
As some detail, there is a proposed 25% tax on unrealized gains for the super wealthy coupled with a 44% tax on realized gains. So let’s say you own 10b of a 100b company. If you do nothing you will owe 2.5b of tax. But if you sell 2.5b, you’d actually owe more! So you end up having to sell a pretty big chunk of your stake. This means that before companies get really large founders have to sell a big chunk of their equity preventing super wealth. It also changes incentive structures for founders making them more likely to cash out.
Once they cash out, PMC will take control. PMC coexists with modern democratic policy. Therefore, the democrat tax proposals help ensure corporations are run by allies.
One thing assisting Musk would be twitter’s massive loss in value after he bought it, according to one recent, independent value estimate. You post unrealized gains or losses using the cost basis of the asset on acquisition. Will Musk get a tax break for the unrealized loss?
How does this even work with a privately traded company?
You're a founder and you (hypothetically) sell an initial 10% stake in your company for 100M, which gives your remaining 90% stake an imputed value of 900M. So now you owe 25% of 900M of this extremely illiquid asset?
Do private company fundraising rounds go down (you'll owe less in taxes) or up (investors cover the tax bill)?
What's even the value of something that's not for sale on any market?
That doesn't really answer the question.
Let's take a concrete example.
Let's say I am Gabe Newell, I own a quarter of Valve, a company that made around $6B in profit last year and which I founded and has never been public. It's clearly worth a lot more than 20% of my considerable net worth, but how much is it worth exactly and who gets to decide that?
Is it worth what capital I originally put in it? Some multiple of how much something else i exchanged a piece of the company is worth? Is it worth how much my bank thinks it's worth when they give me a loan? Is it worth what the IRS just decides it's worth? Is it worth how much I think it's worth? Or what Bloomberg thinks it's worth? Or what some judge thinks it's worth when the government sues me for tax fraud when I fill in any other of these numbers?
Now let's say that tomorrow I decide to announce the release of Half Life 3. The value of the company has clearly changed. Has the value of my unrealized gains changed at all for tax purposes. And by how much?
Well I did expect it would end up being some variation of "a bunch of IRS bureaucrats decide what the value of your shit is", but can we at least apply it to our real world case here.
Valuation events are left unclear, so what is Gabe going to pay on? The value of the company last they changed the cap table multiplied by the Fed rate plus 2 compounded if I'm getting this right?
So it's either going to be since his divorce or the Campo Santo acquisition. And the value is going to be based on how good a lawyer his wife has or how much he wanted some third party developers. Makes perfect sense.
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