Taxation Without Monetization

Categories : Financial, News
February 22, 2023

Almost everyone has experienced some stress from incurring a significant unexpected expense, which is the reason financial planners advise clients to establish and maintain a significant Cash Reserve, even before attempting to fund long-term goals. “Running out of money before running out of month” is a common problem, articulated by far too many Americans. Whether new tires, appliance repairs, A/C failing during a Florida summer – these and other emergencies strain individual and family cash flows.

What really irks many Americans are unexpected tax bills. Some surprises are preventable, such as planning for taxes on 1099 (gig) income, but the worst scenario for an unexpected tax bill arises when the tax does not result from some cash payment received by the taxpayer. One of the most common forms of imputed income is fringe benefits supplied by an employer to an employee. Use of company cars, some insurance benefits above limits, and other items add to W-2 income but do not have a matching cash flow. Tax on these items can also be planned, and withholding adjusted to avoid surprises.

Insatiable governments are constantly searching for new sources of revenue. One of the most insidious tax proposals of modern times was Bill Clinton’s proposed imputed rent income. Under that proposal, IRS would estimate how much a homeowner would pay to a landlord to rent an equivalent property. This amount would be imputed as taxable income. I dubbed this potential cash flow conundrum Taxation Without Monetization. “Monetization” means developing a cash flow from an item or idea.

Over recent decades, several attempts have been made to tax accumulated wealth, in addition to current income. Attempts have also been made to tax unrealized increases in the value of various assets owned by taxpayers. Some of you may remember the Florida Intangible Tax, which Governor Jeb Bush abolished, as he had promised. Since wealth has no inherent cash flow of its own, and income derived from some assets that comprise wealth is already taxable, taxing non-revenue-generating assets constitutes Taxation Without Monetization.

This week, another example of Taxation Without Monetization hit investors who had used the Crypto Lending firm, Celsius Network, which filed for bankruptcy. Investor assets were frozen when the filing occurred. But that didn’t stop Uncle Sam from sending a tax bill to the bilked investors. Problems with Crypto Lending will be discussed later, and we’ll focus on the tax side. Interest earned, but not paid to investors, is taxable income. This creates Taxation Without Monetization. It could have been avoided.

One big Celsius loser, in his own words, “put all my eggs in one basket, and I’m wiped out.” He’d have done much better by investing in eggs.

Van Wie Financial is fee-only. For a reason.