Recently, the Dutch House of Representatives passed a highly controversial measure overhauling the “Box 3” wealth tax. Under this new system, the government will levy a 36% tax on unrealized capital gains. Unlike traditional capital gains taxes—which are triggered only when you sell an asset and lock in your profit—an unrealized gains tax targets the “paper wealth” of your portfolio at a specific snapshot in time.
Imagine walking into a casino, sitting at a blackjack table, and going on a massive winning streak. The chips are piled high in front of you. But before you can cash out, a tax collector taps you on the shoulder and demands a 36% cut of the chips on your table. You pay the tax out of your pile. An hour later, your luck turns, and you lose most of the remaining chips. When you finally walk out of the casino, you have less money than you started with—but the tax collector still keeps their cut of your temporary “winnings.”
This is not a theoretical thought experiment ; it is the impending reality for retail investors, retirees, and savers in the Netherlands.
Dutch Parliament Member Michel Hoogeveen has been a vocal critic of this legislation, warning of its devastating consequences for ordinary investors.
The Deep Dive : Why This Policy is Economically Toxic
Michel Hoogeveen’s example highlights several fundamental flaws in taxing unrealized gains that go far beyond a single bad year in the stock market. This policy fundamentally alters the nature of property rights and the mechanics of compounding wealth.
1. The Confiscation of Compound Interest
Albert Einstein famously called compound interest the “eighth wonder of the world.” Wealth is built over decades by buying quality assets, reinvesting dividends, and leaving the principal alone to grow.
The Dutch 36% unrealized gains tax effectively acts as an annual wealth confiscation mechanism. By forcing investors to liquidate 28% of their shares just to cover a tax bill on temporary gains, the government destroys the investor’s ability to compound those shares in the future. Even if the market roars back the following year, the investor has 140 fewer shares participating in that recovery. Over a 20- or 30-year investing horizon, this annual forced liquidation will mathematically decimate middle-class retirement accounts.
2. Treating Volatility as Income
Income, by definition, implies cash flow. When you receive a salary, a dividend, or cash from selling a house, you have liquidity. You have the actual means to pay a percentage of that liquidity to the government.
An unrealized gain is not cash flow ; it is simply market volatility. A share price is nothing more than the price at which the last two people agreed to trade. By treating paper volatility as taxable income, the Dutch government is taxing a mirage. As the example proves, they are taxing money that the investor never actually possessed in any spendable form.
3. Pro-Cyclical Market Risks
Imagine the systemic risk this creates. If hundreds of thousands of Dutch investors all face massive tax bills based on a January 1 high, and the market dips in the spring, what happens ?
A localized “forced selling” event occurs. To pay the tax man, thousands of investors must sell off their equities simultaneously. This influx of sell orders puts further downward pressure on stock prices, exacerbating the market crash and, in turn, reducing the wealth of everyone in the system. The tax policy actively contributes to market instability.
4. The “Next Year Deduction” Fallacy
Proponents of unrealized capital gains taxes often argue that the system is fair because if the market drops, the investor can claim a capital loss in the subsequent tax year to offset future gains.
This is a fundamental misunderstanding of cash flow and opportunity cost. While a taxpayer might receive a tax credit the following year for the loss from €100,000 down to €60,000, that credit does not magically replace the 140 shares they were forced to sell in May. The underlying asset is gone. A future tax credit on paper does not repair the immediate destruction of principal.
conclusion
The world’s economic policymakers are watching the Netherlands closely. Historically, the Dutch have been pioneers in global finance, inventing the first modern stock exchange and the first publicly traded corporation (the VOC) in the early 17th century.
Now, they are pioneering one of the most aggressive experiments in wealth taxation in modern history. Politicians in other nations—including factions within the United States Congress—have repeatedly floated the idea of taxing unrealized gains, usually marketing it as a way to force ultra-billionaires to “pay their fair share.”
The fundamental purpose of taxation is to fund the public good by taking a percentage of the economic value that a citizen has actively realized. The new Dutch Box 3 legislation abandons this principle entirely.
By taxing unrealized gains, the government essentially claims co-ownership of your private property’s theoretical value, but takes zero responsibility for its downside risk. If your stock goes up, they demand cash. If your stock crashes before you can pay them, that is your problem—you still owe them the cash based on the high-water mark.
