Steven M. Sheffrin (Tulane; Google Scholar), Taxpayer Realization and Economic Welfare:

Should we tax unrealized capital gains? This paper provides a new perspective on this controversial issue by evaluating the  realization requirement as applied in modern taxation in terms of conventional measures of economic welfare. Drawing on recent academic research which measures economic welfare when asset prices can change either because of changes in discount rates or changes in cash flows, it provides new insights into the wisdom of taxing unrealized gains or losses. The bottom-line from this literature is that in the absence of changes in expected cash flows, economic welfare is directly related to the value of asset transactions (sales or purchases), not to changes in asset values. In particular, if asset values increase because of discount rate changes, taxpayer realization of the gain tracks economic welfare. Unrealized gains in this case should not be subject to tax. A key contribution of this paper is to explain the intuition behind the recent academic research and discuss in detail its relationship to the tax law concept of realization.

Realization-based tax systems, however, do not systematically track measures of economic welfare. The links between realization in the tax code and measures of economic welfare are complex. Another contribution of this  paper is to use the recent research on asset price changes to provide an assessment of the realization principle as applied in taxation and how it may deviate from measures of economic welfare. Especially in the context of asset exchanges, the tax realization and economic welfare concepts differ sharply. Using this framework, the paper provides new insights into the realization requirement, its application and refinement in case law,  and the related concepts of non-recognition. like-kind exchanges and wash sales. And it opens up the possibility for tax scholarship to move beyond intuitions derived from the Haig-Simons framework. 

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