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Recently, the Dutch government approved a major reform of its Box 3 tax system, which applies to private savings and investments.

The reform was introduced after the Dutch Supreme Court ruled that the previous system was unfair because it taxed assumed returns rather than actual performance. A new framework was therefore designed to tax what policymakers call real returns.

The crucial detail is this.

Under the proposed system, investors may be taxed not only when they sell assets and realize gains, but also on unrealized gains. If stocks or other investments increase in value during the year, tax could be owed on that increase even if nothing was sold and no cash was received.

The proposed rate discussed is 36 percent on annual gains within Box 3, above certain exemption thresholds. This type of approach is often referred to as mark to market taxation and is relatively uncommon for private investors, which explains the international attention it has received.

There is something fundamentally different about taxing unrealized gains.

If an investment rises in value but I do not sell it, no money has entered my account. Nothing has been realized. There is only potential. Traditionally, capital gains tax is triggered when that potential becomes real. When you sell. When liquidity exists.

Taxing valuation increases as income is not just a technical adjustment. It is a philosophical shift.

Compounding depends on leaving capital untouched. Growth builds on growth. When gains are taxed annually, the base that compounds shrinks each year. Over decades, that difference becomes substantial.

Let’s make it practical.

Imagine an investor with €100,000 invested in stocks, earning an average annual return of 7 percent. No selling. No withdrawals. Pure long term compounding.

Under a realized gains system, after 20 years the portfolio grows to roughly €387,000.

If the yearly gain is taxed at 36 percent, the effective annual return drops from 7 percent to about 4.5 percent after tax.

After 20 years, the portfolio grows to around €241,000.

That is a difference of approximately €146,000.

Not because markets performed differently.

Not because the investor made poor decisions.

But because compounding was interrupted every year.

Now assume a higher growth scenario of 10 percent annually.

Without yearly taxation, €100,000 grows to about €673,000 after 20 years.

With 36 percent tax applied to each annual gain, the effective return becomes roughly 6.4 percent. The result after 20 years is about €344,000.

The difference exceeds €300,000.

The stronger the growth, the stronger the impact of annual taxation on unrealized gains.

There is also a liquidity question. If assets appreciate but produce no cash flow, investors may need to sell part of them simply to pay the tax. That introduces friction into long term ownership and subtly shortens investment horizons.

Tax systems shape incentives. Incentives shape culture. A system that taxes unrealized growth may increase short term revenue, but it can also reduce appetite for risk, patience, and long term capital formation.

This is not automatically expropriation. Governments have the authority to tax. The legal boundary lies in proportionality and fairness, and courts ultimately decide where that line stands.

The deeper question is cultural.

Do we want to tax growth before it becomes real.

Or do we want to create an environment where patience is rewarded and compounding can unfold uninterrupted.

Revenue can be calculated.

But the long term effect on how people think about investing, risk, and the future is far harder to measure.

Yet over time, that invisible layer may prove more valuable than the revenue itself.