I think winning that argument would require understanding the loophole. How well do you understand it? I freely admit my grasp of it is quite poor. I'd welcome insight from others.
If they work for the fantasy equivalent of the IRS, they probably understand tax law better than the dragon does.
If youre asking how well I understand the dragon's argument, its basically arguing that until the assets are actually sold, their value is theoretical and therefore not taxable. While implying that they cant collect tax from the dragon anyway even if it could be taxed because it is hoarding said unsold assets not currency/gold with a well defined value which is a "thats the dragon's problem not ours" situation.
It also depends where they are some areas of Europe have holdings taxes but no capital gains tax so the dragon would need to pay taxes on the holdings.