On April 28, 2021, President Biden first unveiled his Capital Gains Tax Reform, which sparked considerable discussion. While there hasn’t been an update regarding the proposal and its next steps, the reform suggests a substantial increase in the capital gains tax rate, particularly for high-income investors.
With investors left in the dark about where their investments stand, it’s important to stay up to date to avoid being blindsided. Keep reading to see what this reform could mean for you and your investments.
What Is A Capital Gains Tax?
Capital gains refer to the profit realized when an asset such as property, stock shares, or equities are sold for a price higher than the purchase cost. If you invest in shares for $1,000 and their market value increases to $1,500, the $500 profit would be classified as capital gains when you sell them.
The Basics Of Capital Gains Taxes
There are two capital gains tax categories: long- and short-term. Long-term capital gains stem from assets held for more than a year, reflecting lower tax rates to incentivize longer investment hold periods. Short-term, on the other hand, applies to profits from assets sold within a year of acquisition typically subjected to higher tax rates equivalent to ordinary income levels.
Historically, tax rates on capital gains in America have been lower than those of standard income primarily due to the tax reform between 1981 and 1986. During this period, a provision exempted 60% of capital gains from tax, meaning that only two-fifths of net long-term capital gains were subject to taxation. This policy aimed to encourage saving over consumption since taxing capital gains can potentially discourage saving by creating incentives for immediate spending over future savings.
Current Capital Gains Tax Rates
Capital gains tax rates are based on the amount of the taxpayer’s income and the holding period of the asset. Investors should note that these rates apply to the 2022 and 2023 tax years.
| Income Bracket | Long-Term Capital Gains Tax Rate | Short-Term Capital Gains Tax Rate |
| Up to $40,400 (individuals) / $80,800 (joint filers) | 0% | Ordinary Income Tax Rate 10%-12% |
| $40,401 to $445,850 (individuals) / $80,801 to $501,600 (joint filers) | 15% | Standard Income Tax Rate 22%-35% |
| $445,851 and above (individuals) / $501,601 and above (joint filers) | 20% | Standard Income Tax Rate 37% |
The Biden Administration’s Proposed Tax Reform
The proposed changes specifically target wealthy individuals and top-earning Americans to fund various initiatives outlined in the budget plan. If implemented, the Biden administration would increase the top income tax rate from 37% to 39.6%, affecting short-term capital gains. However, this change is expected to impact only the top 1% of taxpayers, ensuring that the burden of the increase falls on those with the highest incomes.
The administration has also proposed significant changes to the long-term capital gains tax by adjusting the tax income levels. This means it’ll take more income to reach the 15% or 20% brackets, potentially putting more individuals in the 0% tax bracket. Currently, the maximum rate for long-term capital gains stands at 20%; however, under Biden’s proposal, this rate would nearly double to 39.6%.
Biden’s proposal also includes expanding the net investment income tax (NIIT) to target high-income taxpayers further. This tax, introduced as part of the Affordable Care Act, currently applies a 3.8% tax rate to certain investment income for individuals with adjusted gross income over $200,000 ($250,000 for married couples). Biden’s plan proposes to extend this tax to individuals earning $400,000 or more, further only targeting high-income taxpayers.
Biden’s proposed capital tax reform primarily targets traditional investments, including stocks, bonds, and real estate assets. However, not all investments fall under this capital tax reform. Certain assets, such as precious metals and collectibles, are not slated to be affected by these changes, allowing investors to diversify their portfolios and potentially mitigate the impact of the proposed tax hikes.
Economic Implications For Capital Gains Tax Reform
While there’s an ongoing debate about the exact revenue implications of capital gains tax reform, proponents argue that this tax reform can be a valuable tool in addressing the country’s fiscal challenges.
Encouraging Investment and Economic Growth
Reducing capital gains taxes can incentivize individuals and businesses to invest more in productive assets. When investors can keep a larger share of their profits, they’re more likely to spend and consume, boosting demand for goods and services. Higher consumer spending can increase production and sales, job creation, and overall economic growth.
Lower capital gains taxes can also make a country more attractive to international investors looking to grow their wealth. A country with a favorable tax environment for capital gains can become a magnet for foreign capital. This can positively affect other sectors of the economy and contribute to long-term development.
Promoting Market Efficiency
High capital gains tax rates may discourage investors from selling their assets, as they would have to remit a significant portion of their profits to the government. This can lead to a phenomenon known as “lock-in,” in which investors hold on to their assets longer than they otherwise would have.
By reducing the tax burden on capital gains, investors are more likely to sell their assets when it makes economic sense. This increased liquidity can improve resource allocation and help financial markets function more efficiently.
Reducing The Federal Deficit
By reassessing and possibly changing capital gains tax rates, policymakers can generate additional revenue. This additional income could be used to fund public programs and reduce the national debt. The premise is that lower tax rates can stimulate economic activity and thus increase tax revenues.
The additional income from these tax adjustments could bridge budget deficits, invest in infrastructure initiatives, or provide much-needed support to the education and healthcare sectors.
Boosting Fairness And Equality
Proponents argue that current preferential tax rates on capital gains disproportionately benefit wealthy individuals and exacerbate income inequality. By taxing capital gains at ordinary income tax rates, reforms could help create a fairer system in which everyone pays their fair share.
Such a change in the tax structure could increase socioeconomic mobility. By leveling the playing field, reforms could promote a more equitable distribution of wealth and allow broader sections of society to improve their economic status. This could lead to a stronger, more resilient society and strengthen our collective ability to withstand economic downturns.
Additionally, this reform could impact investment behavior and encourage individuals to seek other investment opportunities. This could promote economic diversity and further strengthen the economy’s resilience and adaptability to future challenges.
Arguments Against Capital Gains Tax Reform
President Joe Biden’s proposed capital gains tax reform has been met with significant opposition, particularly from special interest groups and lobbyists.
Decrease Tax Revenue
Conventional wisdom might suggest that higher tax rates would automatically lead to increased revenue for the government. However, some researchers challenge this assumption, arguing that investors are extremely sensitive to increases in capital gains taxes. They contend that higher tax rates could discourage investing, leading to a decrease in capital gains and, consequently, a reduction in tax revenues.
This perspective suggests there needs to be a delicate balance when forming capital gains tax rates. Setting them too high could potentially stifle investments and reduce tax revenues while setting them too low could exacerbate income inequality and encourage tax sheltering, where individuals and corporations use legal strategies to avoid paying taxes.
Unintended Consequences For Middle-Class Investors
Critics fear this reform could lead to reduced opportunities for growth and wealth accumulation for the middle class. There’s concern that higher capital gains taxes could disproportionately impact these investors who rely on investments for retirement income.
Many middle-class Americans have invested in stocks, mutual funds, or alternative assets through retirement accounts like 401(k)s or IRAs. Proposed changes to the taxation of capital gains could erode the value of these investments over time, impacting the financial security of middle-class retirees.
Invest In Precious Metals Today
If you’re looking for a way to hedge against the volatility that could result from this tax reform, now is the perfect time to diversify your investment portfolio with precious metals. Whether you’re in the market for physical bullion to store at home or IRS-approved metals to keep directly in a tax-advantaged precious metals IRA, Noble Gold Investments offers a wide selection of gold, silver, and other metals.
Give us a call today to speak with one of our representatives about opening an account, or click here to open an account online.
