Daily Mail reported that President Joe Biden has announced plans to raise capital gains tax rates, which could significantly alter the financial landscape for American investors and businesses.
Capital gains tax, which is applied to the profits made from selling assets such as stocks, real estate, or cryptocurrencies, currently stands at a top rate of 23.8%. President Biden's budget for 2025 suggests increasing this rate to 44.6% for the wealthiest Americans. This adjustment is part of a broader tax overhaul aimed at addressing income and investment earnings more progressively.
The tax hike coincides with the expiration of the Tax Cuts and Jobs Act (TCJA) of 2017, leading to a potential doubling of tax burdens for some by January 1, 2026. This expiration compounds the impact, significantly altering investors' economic calculations and possibly leading to sell-offs or strategic shifts in investment portfolios before higher rates take effect.
The combined state and federal capital gains taxes could exceed 50% in states like California, New York, and Hawaii. Such substantial increases could deter investment and negatively impact financial markets and the broader economy.
The proposed changes extend beyond rate adjustments. They also aim to restructure the taxation of inherited assets. Currently, heirs can inherit assets without being taxed on the gains accrued during the original owner's lifetime, a rule known as the "step-up in basis." Biden's plan would end this benefit, potentially leading to significant tax liabilities for heirs at the time of inheritance.
Ted Jenkin, CEO of oXYGen Financial, voiced concerns about the broader implications of these tax increases. "The planned increases will go into effect at the same time critical tax cuts brought in by Trump will also expire," Jenkin explained.
This proposed fiscal adjustment comes at a time when stock ownership has significantly increased, growing from 53% of US households in 2019 to 58% in 2022. With more Americans involved in the markets, the effects of these tax changes could be widely felt.
Business leaders fear that the higher capital gains tax could reduce incentives to invest and grow businesses. This concern is exacerbated by the potential behavior of business owners who might rush to sell companies before the tax hike takes effect.
Ted Jenkin specifically highlighted the potential rush by investors to divest their interests ahead of the changes:
If these new policies take effect when the Tax Cuts and Jobs Act of 2017 expires at the end of 2025, we will be staring down a barrel in 2025 of millions of Americans selling off their highly appreciated stock positions at today’s long-term capital gains rates versus paying double in 2026.
The impact on the entrepreneurial landscape could also be severe. Higher taxes may dampen the entrepreneurial spirit by lessening the financial rewards of business risks.
This potential upheaval in the investment world is causing worry among many business owners and investors. Ted Jenkin's added:
This could also have a significant trickle-down effect on people losing their jobs as smaller companies consolidate into larger ones and could also stagnate the germination of new businesses as the upside potential to take on financial, legal, and personal risk may not give entrepreneurs the excitement to launch businesses as they have in the past.
In summary, President Biden's proposed increase in capital gains tax could dramatically influence the U.S. economy, affecting everything from individual investment decisions to the operational strategies of large corporations.
By restructuring the taxation landscape significantly at a time when key tax relief measures are expiring, the administration is making a strong fiscal policy shift that could have lasting repercussions for the market and societal economic structures.
