Key Takeaways
- Understand how California’s recent tax proposals could require you to pay tax on asset appreciation even if you haven’t sold anything.
- See why unrealized gains create a liquidity problem for investors or businesses that hold significant value but limited cash.
- Learn how tax proposals change the risk profile of investing in California, influencing decisions around holding assets, building businesses, and where to live.
- Think strategically about liquidity, residency, and policy risk so you can make informed decisions instead of reacting to headlines.
What California Is Actually Proposing (and Why It Matters Now)
Recent tax proposals in California could fundamentally change how investment gains are taxed. Under the current system, capital gains taxes generally apply only when you sell an asset at a profit.
Since 2020, however, California lawmakers have repeatedly explored versions of a wealth-style tax built on annual mark-to-market valuation of assets. This means that you could owe tax on the increase in value of your assets, even if you haven’t sold anything and haven’t received cash.
While the details vary by bill, California’s proposals tend to follow a consistent theme: tax is calculated based on changes in asset value, not actual sales or liquidity. In most versions, this involves:
- Annual valuation of assets
- Year-end snapshot dates used to measure taxable appreciation
- Complex valuation rules for illiquid holdings, such as private companies or real estate
Some proposals have included a one-time 5% tax on billionaires’ assets, while earlier drafts contemplated annual taxes of 1% on net worth above $50 million and 1.5% for billionaires. Other versions have broadened potential exposure by tying the tax to income levels, rather than net worth alone.
While the most aggressive versions have not been enacted, what may seem like an abstract policy discussion today should be treated as a real planning risk, especially if you hold significant appreciated assets.
Unrealized Gains vs. Real Liquidity: The Core Problem
This is where the mechanics start to matter.
- An unrealized gain is the increase in value of an asset you still hold. If you buy stock at $100 and it later trades at $150, you have a $50 unrealized gain. It’s a paper profit, so it shows up on a statement, but it doesn’t put cash in your bank account.
- Liquidity is the cash you actually have available to pay bills, fund expenses, and pay taxes.
Here’s where proposals to tax unrealized gains create a real cash-flow problem. For example: if an investor buys $2 million of publicly traded stock. By December 31, the position is valued at $3 million. Under a proposal that taxes appreciation at 5%, the $1 million unrealized gain would generate a $50,000 tax bill.
The issue is simple: the investor hasn’t sold anything. No cash has come in. They still just hold shares in a brokerage account.
Under the current federal system (and most state systems) tax is generally due only when you sell an asset and receive cash. That structure gives investors control. You decide when to sell, how much to sell, and how to manage liquidity to cover the tax. But, the mark-to-market approach breaks that connection.
This liquidity mismatch becomes even more problematic once you factor in market volatility. Asset values are measured on a snapshot date, typically year-end. But prices can move quickly after that date. If a $3 million position drops to $2.5 million by the time taxes are due, the tax bill doesn’t adjust. You still owe tax based on the higher valuation until the next annual revaluation.
Some investors may try to cover the gap by borrowing against their assets. That introduces additional risk through debt exposure and margin leverage.
In effect, you’re taking on debt to pay tax on gains you haven’t actually received, and may never receive if the market reverses.
Who Gets Hit the Hardest: Founders, Investors, Real Estate, and Crypto
While these proposals are often framed as “taxing billionaires,” their design can pull in a much broader group of asset-rich but cash-constrained Californians. People tend to underestimate how quickly paper wealth can cross proposed thresholds – especially during strong markets.
Startup Founders and Early Employees
Consider a startup founder or early employee holding a meaningful stake in a private company valued by a recent funding round. A 2025 Series D might peg the company at a $2 billion valuation, making a 5% stake worth $100 million on paper.
The issue isn’t valuation – it’s liquidity. Founders and early employees typically receive limited cash compensation relative to that paper value. Their shares are illiquid, restricted, and often cannot be sold without approval.
Under proposals that apply taxes based on asset values, even relatively modest rates can translate to hefty tax bills. That creates a difficult scenario: owing cash tax on wealth you cannot readily access.
Long-Term Public Market Investors
Long-term investors who have accumulated large positions in companies like Apple or Tesla face a different version of the same issue. Valuation-based taxes can create repeated liquidity pressure over time, even when investors intend to hold assets for retirement or legacy planning.
Instead of allowing gains to compound, investors may feel forced to sell portions of their holdings simply to manage tax obligations tied to unrealized appreciation.
Real Estate Owners
Now consider a landlord who bought a four-plex in San Jose or Santa Monica in 1990 for $400,000. Today, that property might be worth $4 million, representing $3.6 million in unrealized appreciation.
These owners are often asset-rich but cash-flow constrained. After mortgage payments, property taxes, maintenance, and repairs, net rental income may be modest. Even a relatively low annual tax tied to appreciation could exceed actual cash flow, pushing owners toward refinancing or sale.
Crypto Holders
Crypto presents the most extreme version of the liquidity problem. Assets like Bitcoin and Ethereum routinely swing 50% or more within a single year. Being taxed based on a December 31 valuation can create severe cash-flow stress if prices fall sharply before taxes are due.
California offers a recent illustration. In 2021, many tech valuations and crypto prices peaked. By 2022–2023, markets corrected sharply. Under a valuation-based tax regime, investors could have faced tax obligations on 2021 paper gains that had largely evaporated by the time payment was required.
The Broader Impact
When valuation-based taxes force investors, founders, or property owners to sell assets simply to cover tax obligations, the effects extend beyond the individual.
Forced or synchronized selling (particularly around year-end valuation dates) can amplify market volatility. Over time, the ripple effects become harder to ignore:
- Founder and talent flight: Companies may think twice about locating or scaling in California if equity compensation creates recurring liquidity stress.
- Investment hesitation: Real estate and long-term capital investors may redirect funds to states with more predictable tax treatment.
- Wealth migration: High-net-worth individuals often plan relocations years in advance, and policy uncertainty can accelerate those decisions.
These outcomes don’t just affect individual taxpayers. They also influence where capital, businesses, and innovation ultimately settle.
What Investors and Business Owners Can Do Now
Because these proposals can evolve quickly, the goal isn’t panic—it’s positioning. Think in terms of flexibility and scenario planning, not reactionary selling based on early drafts.
Work With Advisors Who Track Policy Risk
If you own significant appreciated assets, or you’re considering major moves like selling, relocating, or restructuring, hasty decisions based on early headlines can create unnecessary risk. The details matter, and they change quickly.
Partner with qualified multi-state CPAs or legal advisors who actively track California’s legislative developments. These experts can help you model multiple outcomes before decisions become urgent. That forward-looking planning gives you time to protect liquidity, preserve flexibility, and avoid costly moves driven by incomplete information.
Re-Evaluate Residency Strategically
For some, long-term plans may still point to California. For others, relocating may better align with both lifestyle and tax objectives, with common alternatives including Nevada, Texas, Florida, and Arizona.
That said, California applies strict residency and source-of-income rules. Changing a mailing address alone isn’t enough. If you consider a move, you need clear, documented evidence that you’ve established domicile elsewhere. This includes changes to housing, utilities, licensing, and daily life. California is known for closely scrutinizing former residents who claim they’ve left, so preparation and documentation matter.
Build Liquidity Before You Need It
Maintaining a buffer of cash or short-term liquid assets (such as Treasury bills or money-market funds) can help absorb unexpected tax obligations. If you have liquidity you won’t necessarily be forced into selling long-term holdings at the wrong time.
The objective is simple: avoid being pushed into bad decisions by timing.
At Fusion CPA, we actively track legislative changes across states and translate them into practical planning. Our team of multi-state CPAs helps you stay ahead of policy risk, protect liquidity, and position your assets with clarity and confidence. Contact us for help today!
Frequently Asked Questions
Is California taxing unrealized gains right now?
Not yet. As of late 2024, California has not enacted a broad unrealized-gains or wealth tax. However, multiple proposals and ballot initiatives have been introduced and ongoing budget pressure makes future attempts likely. Always confirm the current legislative status before making major financial decisions.
Who would an unrealized-gains tax apply to?
Most proposals have targeted high-net-worth individuals, with thresholds ranging from tens of millions to over $1 billion in assets, or high income levels. Definitions and thresholds vary by proposal and can expand over time, which is why ongoing monitoring matters even if you’re below current limits.
If I move out of California, does that eliminate the risk?
Not automatically. California implements strict audits for residency changes. Therefore moving states be well supported in terms of providing documentation to prove the validity of the exit.
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This blog does not provide legal, accounting, tax, or other professional advice. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive