Billionaires Income Tax Act Mandates Annual Tax on Unrealized Gains, Ending Deferral for the Ultra-Wealthy

The new Billionaires Income Tax Act is a massive shakeup for the ultra-wealthy, specifically targeting "applicable taxpayers"—individuals with over $100 million in income or $1 billion in assets. What’s the punchline? For this small group, the era of indefinitely deferring taxes on asset appreciation is over. The bill fundamentally changes how these taxpayers are assessed, requiring them to pay tax annually on the growth of their investments, even if they haven't sold them yet. This "mark-to-market" system aims to treat asset appreciation like a regular paycheck, making sure the wealthiest pay tax on their gains every year, starting in 2026 (Title II). This policy is designed to close the gap where a wage earner pays tax on every dollar they earn, but a billionaire can borrow against appreciating assets and never owe capital gains tax until they decide to sell.

The End of “Buy, Borrow, Die”

The core of this legislation, found in Title I, is the mandatory annual recognition of gains on “covered assets.” Think of it like this: if you own publicly traded stock that goes up $10 million this year, you now owe tax on that $10 million, even though you still hold the stock. For assets that aren't easily traded, like private equity or real estate holdings (called "nontradable covered assets"), the bill eliminates tax deferral on certain transfers. If an applicable taxpayer transfers these assets in a typically tax-free exchange, they must now recognize the gain immediately and pay an interest charge—a "deferral recapture amount"—on the tax that should have been paid in prior years. This is a direct attack on the common strategy of holding assets until death to pass them to heirs tax-free.

The Tax Man Follows the Asset

This bill has major implications for estate planning. Under the new rules, giving away assets as a gift or transferring them upon death is generally treated as if the original owner sold the asset for fair market value right before the transfer (Title I). This means the transferor—the person who died or gave the gift—has to recognize the gain and pay the tax. This effectively eliminates the decades-old "step-up in basis" for these assets, which allowed heirs to inherit assets and sell them immediately without paying capital gains tax. If your parents are an applicable taxpayer, the tax bill on their massive asset appreciation is now due before you even inherit the money. This is arguably the most significant change, ensuring that accumulated wealth is taxed at least once.

Closing Loopholes and Ramping Up Taxes

Beyond the mark-to-market rule, the bill targets several specific tax breaks for applicable taxpayers (Title II). For instance, it removes the Adjusted Gross Income (AGI) limitation on the Net Investment Income Tax (NIIT). Currently, many high earners can limit their NIIT liability based on AGI thresholds; this bill ensures applicable taxpayers are subject to the NIIT regardless of their AGI. Furthermore, it voids the popular tax exclusion for Qualified Small Business Stock (Section 1202) for these taxpayers, meaning they can no longer exclude massive gains from tax when selling certain small business stock acquired after November 30, 2025. These provisions dramatically increase the tax exposure for the targeted group.

The Practical Challenge of Illiquid Assets

While the bill aims for fairness, the implementation creates a massive practical challenge: liquidity. If an applicable taxpayer owns a business, a ranch, or a large amount of private equity that appreciates significantly, they will owe tax on that gain annually. If they don't have enough cash on hand to pay the tax bill, they may be forced to sell a portion of the asset—or the entire business—just to cover the tax liability. The bill allows a limited loss carryback, but only against gains created by these new mark-to-market rules, which is a narrow benefit (Title I). The sheer complexity of valuing these illiquid assets every year will likely lead to significant disputes and administrative burdens for both the taxpayer and the IRS.