All capital gains are unrealized until the asset is sold. The point is that defering realization may negate your argument.
The question is how the deferred capital gains have anything to do with the effect of inflation.
It has to do with the benefits of
compounding. (Are you aware that
even without the benefit of lower tax rate on long-term gains — and even ignoring the tax advantage of passing to heirs at death, and ignoring inflation — waiting years to sell reduces taxes?)
Let's look at specific arithmetic. To keep the numbers simple, assume 10% annual stock appreciation, 5% annual inflation, and a 50% tax rate.
1 year (1990 - 1991)
200 --> 220 --> 210 --> 200
7 years (1990 - 1997)
200 --> 390 --> 295 --> 209.65
The first number ($200) is starting investment; the 2nd number ($220 or $390) is what you sell it for after 1 (or 7) years assuming 10% annual gain; the 3rd number what's left after you pay the tax man; the 4th number is the inflation-adjusted version of the 3rd number.
So, if you switch stocks every year, the profit after inflation is equal to the tax. Reinvest the (inflation-adjusted) $200 in 1991 and get the same net value when you sell it in 1992; and so on. In 1997 you finish with $200 in "1990 dollars." All the real gain has been taxed away.
But hold that stock for 7 years, sell it, pay the tax, and finish with almost $210 in "1990 dollars."
ETA:
Do the same calculation with 0% inflation, and your $200 grows to $281 after 7 years if you trade once a year, and to $295 (after taxes) if you wait 7 years to sell.