Billionaires Income Tax Act: Taxing Unrealized Gains on $1B+ Assets Annually Starting 2026

This legislation, officially titled the Billionaires Income Tax Act, aims to fundamentally change how the ultra-wealthy pay taxes. Starting in 2026, it forces individuals with over $1 billion in assets or more than $100 million in income for three consecutive years (dubbed 'applicable taxpayers') to pay tax annually on the appreciation of their investments, even if they haven't sold them. This shift, known as 'mark-to-market' taxation, is designed to end the indefinite tax deferral strategy often used by the wealthiest Americans.

The End of the 'Buy, Borrow, Die' Strategy

For most people, paying taxes on income is simple: you get a paycheck, and taxes are taken out immediately. Wealthy individuals, however, often grow their wealth through assets like stocks or private company holdings, which are only taxed when sold. This bill targets that deferral by requiring applicable taxpayers to recognize the gain or loss on their tradable assets every December 31st, as if they sold them for fair market value (Section 491). This means a billionaire who sees their stock portfolio increase by $100 million in a year will owe capital gains tax on that $100 million, regardless of whether they sold a single share. For those with hard-to-value, non-tradable assets (like stakes in private companies), the bill imposes a complex 'deferral recapture amount'—essentially interest—when they transfer the asset (Section 492).

Hitting the Heirs: The Basis Step-Up is Gone

One of the most consequential changes is the elimination of the 'step-up in basis' at death for applicable taxpayers (Section 494). Currently, if a person buys stock for $10 and it's worth $100 when they die, their heir inherits it with a new cost basis of $100, meaning the $90 gain is never taxed. This bill treats the transfer of assets through death as a 'deemed sale' at fair market value, meaning the deceased taxpayer’s estate must pay tax on all the accumulated unrealized gains. For the children inheriting a family business or a large portfolio, this means they will inherit a major tax bill covering decades of appreciation that the original owner never paid.

Closing Loopholes and Adding Complexity

Beyond the core mark-to-market rule, the bill strips away several tax benefits exclusively for applicable taxpayers. First, it removes the Adjusted Gross Income (AGI) limit for the Net Investment Income Tax (NIIT), meaning 100% of their investment income is subject to the 3.8% tax, regardless of their income level (Section 201). Second, it blocks applicable taxpayers from using tax deferral mechanisms like the Qualified Small Business Stock (QSBS) exclusion (Section 231) and deferral elections for Qualified Opportunity Funds (Section 232). Applicable entities (like partnerships or trusts controlled by these taxpayers) also lose the ability to use 'like-kind exchanges' (Section 1031) for property swaps (Section 211).

The Compliance Headache

This new system introduces massive compliance burdens. Taxpayers entering applicable status can elect to pay the initial tax liability in five annual installments (Section 496), but the complexity of valuing non-tradable assets annually will likely lead to significant disputes with the IRS. Furthermore, the bill introduces new reporting requirements for deferred compensation payments over $5 million and completely changes the taxation of private placement life insurance and annuity contracts, which previously offered tax-advantaged growth and tax-free death benefits. Now, death benefits from these contracts held by applicable taxpayers will be taxable (Section 222), and withdrawals will face a new 10% penalty tax, plus interest recapture on the deferred compensation (Section 221).