Why does the App calculate capital gains each year for taxes even though we have not sold any stocks? Is the reason based on the fact that insufficient cash is available so the App assumes that stocks will be sold to meet the desired withdrawal amount to cover expenses and taxes due?

You answered yourself. If you need money and it is coming from non-registered accounts, investments will be sold and capital gains apply. Make sure you’ve entered the book value (cost-basis) for the investments so that the taxes are accurate.