Capital Gains: Realization Does Not Matter

The purchase/sale has zero effect on either party’s total assets or wealth.

You’re looking at your asset portfolio and decide to sell or buy some ETF shares. Click.

The transaction is a dollar-for-dollar asset swap between you and your counterparty, at current market prices: M assets (bank deposits) in exchange for ETF assets, and vice versa. Equal dollar amounts in each direction.

The transaction has zero effect on either party’s total assets or net worth; they’re both unchanged. Likewise for the whole household sector or “national wealth”: no change to assets or net worth.

Of course: the seller may may have to pay cap-gains taxes, depending on what they originally paid for the ETF shares. But that’s immaterial to the basic wealth accounting. There’s no net asset transfer between individuals or groups that they’re part of (high-wealth groups to/from low-wealth groups, for instance).

Each party is just adjusting their asset-portfolio mix. It’s the constant everyday churn of portfolio turnover. In the economic picture (vs. an individual seller’s narrow tax-focused view), that’s the whole story.

So every time you think about capital gains in the big national-accounting picture (vs. individuals’ portfolio juggling), realize this reality: Realization Doesn’t Matter. Accrual and accumulation are what matter. You can watch that happening second by second on your brokerage website, as your assets get marked to market.