BazBudget
Read more
Contents
Introduction
“It’s a barmy idea” is the natural first reaction to headlines claiming the Netherlands is about to slap a 36% tax on unrealised gains.
It perhaps sits on top of a large pile of barmy tax ideas in recent years.
But let’s have a proper look at this, shall we?
On 12 February 2026, the Dutch House of Representatives backed the Actual Return in Box 3 Act, sending it onward for consideration in the Senate.
If, and only if, it clears that hurdle, the plan is for it to take effect on 1 January 2028.
The reform sits inside the Dutch personal tax “box” system. Box 3 is the bucket for savings and investments.
For years, Box 3 has been built on a fiction. That fiction is that the state taxes you on an assumed return (a “notional” yield), even if you didn’t actually earn it.
That approach has repeatedly collided with the courts, and it is this friction that appears to be the real driver of this change.
Why?
Essentially, it appears that the Dutch were pushed here by the courts.
The Dutch Supreme Court has ruled that the old Box 3 framework can violate fundamental rights when the assumed return exceeds the real return.
In its June 2024 judgments, it reaffirmed that the problem persisted even after attempted legislative “repairs”, and it set out what “actual return” means, including not just interest, dividends and rent, but also positive and negative value changes, even unrealised ones.
Until a new regime arrives, the Dutch Tax Administration says it will keep using the notional-return system unless your actual return is lower, in which case you can seek to be taxed on the more favourable basis.
What the new proposal seeks to do (and what it doesn’t)
The new model aims to tax Box 3 on “actual return” rather than assumed return. Practically, that means:
- A flat 36% rate on Box 3 taxable result (returns), with a tax-free limit of €1,800 per taxpayer.
- The taxable “return” is split into:
- Direct return: interest, dividends and rent, generally net of certain costs.
- Indirect return: value changes (up or down). For many assets, that means mark-to-market style taxation. In other words, annual taxation of value movements even if you never sell.
Crucially, it’s also a two-track system designed to blunt the most obvious liquidity pain:
- For many “liquid” financial assets (think listed shares, bonds, crypto), the main rule is capital growth tax, taxing the annual change in value (including unrealised gains).
- For immovable property and certain start-up shares, the law moves value changes into a capital gains approach i.e., gains are generally taxed on realisation (sale/exit), not every year.
That last point matters because a lot of viral commentary uses property as the killer example (“your house went up, so you owe cash”).
Under the proposal, property value appreciation in Box 3 is generally not marked-to-market annually.
But rental/lease income is taxed annually, and the eventual gain is taxed when realised.
There are also some nuts-and-bolts features worth noting:
- Losses: under the proposed regime, negative Box 3 results can be carried forward indefinitely, but only above a €500 threshold (and with no carry-back it seems).
- Complexity warnings: the Council of State (Raad van State) issued a strongly negative view in 2024, warning the system becomes significantly more complex and burdensome for both citizens and the tax authority, and advising against submitting it “in this form”.
“Tax is supposed to follow real income, not paper gains”
The intuitive case against taxing unrealised gains is simple and, certainly at first glance, pretty fair. Tax is usually meant to follow income, gains, and profits that are realised. A “profit” you haven’t crystallised can disappear.
A bird in hand and all that.
Which brings us nicely to the issue of volatility. The bit that makes “paper profits” taxation feel so detached from lived reality.
Imagine a portfolio that rises 25% in year one. Under an accrual/mark-to-market approach, you could owe tax on that increase, cash now please, even if you never sold anything. But, if in year two, markets fall and the asset ends the year below where it started at the beginning of year one, you’ve effectively been taxed on a mirage. Phantom profits.
So, can you “bank” unrealised losses?
Under the proposed Box 3 system, in broad terms, yes, losses can be carried forward (above a threshold) to offset future positive Box 3 income.
But that is not a perfect fix, because:
- You may have already paid tax in year one and only get relief later (time value of money matters).
- If you don’t have sufficient future gains, the “relief” may be delayed indefinitely.
- It can create behavioural distortions: people may de-risk or sell simply to manage tax cashflows, rather than because it’s economically sensible.
In short, the system may recognise volatility on paper, but it does not make the liquidity problem vanish.
“Leverage makes realisation-based capital gains easy to dodge”
There is, however, a serious argument for going after unrealised gains… Or at least for being less sentimental about the traditional “tax only when you sell” principle (Come on, I need to make an attempt at being balanced here!)
If you have appreciating assets and want to fund a lifestyle or make another purchase, you often don’t need to sell (and trigger capital gains) at all. You can borrow against those assets.
This is the logic behind securities-backed borrowing, sometimes labelled a Lombard loan in private banking circles.
The asset rises, you borrow against it, and you spend the borrowed cash. No sale, no realised gain, no immediate capital gains tax… just interest on the loan to pay.
From a policymaker’s point of view, this could be considered a structural problem. The more wealth you have, the easier it is to turn appreciation into spending power without ever “realising” gains.
Realisation-based systems really do create deferral opportunities for the well-advised and well-capitalised.
In other words, why can we only tax the bird in Joe Public’s hand, when the two birds in some billionaire tech giant’s bush are slowly becoming a flock?
What if the flock fly south?
The perhaps obvious behavioural response is to get out of Dodge as fast as you can.
This is a Dutch personal income tax (Box 3) measure, so it’s primarily aimed at people who are Dutch tax resident (who, as a rule, are taxed on their broader Box 3 position).
If you’re not resident, then guidance suggests the Netherlands generally does not tax all your assets in Box 3.
Instead, it typically taxes a limited set of Dutch-situs items, especially immovable property in the Netherlands (and related rights), plus certain profit rights tied to a Netherlands-based business.
As such, at a high level, if someone leaves the Netherlands and breaks tax residence, that can shrink their ongoing Box 3 exposure dramatically if they have non-Dutch assets.
However, the draft legislation anticipates the “fine, I’ll just move” response and includes exit-style protection in at least some situations including shares and for foreign real estate.
In practice, the deemed disposal for foreign real estate would be largely limited to non-treaty countries, because Dutch tax treaties generally allocate real-estate taxing rights to the country where the property sits.
The practical objection
Another issue with these proposals is the administration burden that it is likely to create.
Such a regime is likely to place heavy demands on taxpayers including obligations to keep records, obtain annual valuations (easier for some assets than others) and is likely to impact the resources of the tax authority.
That matters because a system that is theoretically fair but practically unworkable tends to become:
- unfair in practice (only the well-advised navigate it efficiently); and
- politically unstable (it gets replaced, watered down, or riddled with carve-outs).
So, what’s the better alternative?
One instinct might be that, if you’re going to tax unrealised gains, why not do a straight wealth tax instead?
There’s a coherent case for that:
- A wealth tax can be conceptually simpler than annual gain calculations.
- A low-rate annual wealth levy can be less punishing in volatile years than a high-rate tax on annual paper appreciation.
- It also avoids some of the moral contortions around whether borrowing against assets should be treated as “income”.
But wealth taxes have their own problems – valuation disputes, liquidity pressures on asset-rich/cash-poor households, and, again, the thorny issue of how internationally mobile families react.
Also, wealth taxes don’t appear to have a good track record when and where they’ve been introduced.
Conclusion
In the UK, we have seen the steady chipping away of a number of tax’s sacred cows (or should that be crows?). Business reliefs for CGT and IHT along with the proposed introduction of IHT on pensions to name but a few. However, this proposal seems to go further still.
But I acknowledge that this is, in truth, an arbitrary line drawn by me within a wholly arbitrary construct such as tax. Just because we are not used to taxing paper gains does not mean we never should. The real question is whether we can do so without taxing volatility itself.
Because that is the danger. Practically, it can force people to find cash for a bill on gains that later evaporate. The unglamorous mechanics will matter enormously: loss relief that works properly and promptly; sensible treatment of illiquid assets; rules that ordinary taxpayers can comply with without needing a private banker and a tax lawyer on speed dial.
In other words, the policy needs to be a whole lot more than a cheap ‘tax the rich’ slogan.
As they say, a bird in the hand is worth two in the bush. This is because paper gains, along with those birds, have a habit of flying away.
Time will tell whether this reform really manages to tax both… or whether unrealised gain taxation is, in the end, simply for the birds.
