Taxing Capital Appreciation

66 Pages Posted: 4 Jun 2017 Last revised: 9 Sep 2021

See all articles by Ari D. Glogower

Ari D. Glogower

Ohio State University (OSU) - Michael E. Moritz College of Law

Date Written: August 27, 2016


The realization rule — which defers tax on asset gains and losses until a disposition — is a well-known flaw in the income tax. Tax scholars have long recognized that the rule causes inequity, inefficiency, complexity, and revenue loss; allows wealthy taxpayers to avoid the income tax; and distorts the taxation of corporations and capital gains. The realization rule was a problem in the past, and a greater problem now, as financial innovations increase the opportunities for abuse and the need for reform. Prior proposals have generally favored replacing the realization rule with an accrual method accounting for the timing of gains and losses, through mark-to-market taxation, which taxes observed changes in asset value, formulaic taxation, which taxes deemed changes in asset value, or a combination thereof in a mixed regime. While these proposals have attracted much academic interest, they have not gained political traction, due to concerns of administrative feasibility, taxpayer liquidity, behavioral distortions, and public acceptance. This Article first introduces a framework for evaluating realization rule reform proposals, based on the rule’s harms and justifications, and demonstrates that none of the prior proposals adequately satisfies the framework’s criteria. It then introduces a new approach to taxing capital appreciation, “Deferred Tax Accounting,” which integrates accrual principles within the current realization system. Deferred Tax Accounting has two components, a flexible payment rule for traded or regularly valued assets, and a retrospective rule for nontraded assets that are not regularly valued. Deferred Tax Accounting allows taxpayer choice in timing tax payments, and — as under current law — never requires payment of tax prior to a realization event. Unlike prior proposals, Deferred Tax Accounting addresses all the key considerations for effective realization rule reform, and thereby eliminates the biggest obstacle to a more fair and consistently progressive income tax.

Keywords: Tax Law, Tax Policy

JEL Classification: K34

Suggested Citation

Glogower, Ari D., Taxing Capital Appreciation (August 27, 2016). Tax Law Review, Vol. 70, No. 1, 2016, Ohio State Public Law Working Paper No. 398, Available at SSRN:

Ari D. Glogower (Contact Author)

Ohio State University (OSU) - Michael E. Moritz College of Law ( email )

55 West 12th Avenue
Columbus, OH 43210
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics