- The staggering proposal to hike up capital gains tax rate…
- How New Yorkers and Californians could be on the hook for even more…
- Why President Biden is pushing the agenda and his proposed plans for the funds…
The threat of higher taxes is hovering over Wall Street.
Reports emerged on Thursday that President Joe Biden is considering a proposal to nearly double the capital gains tax on the wealthy.
That plan would increase the capital gains tax rate for those making $1 million or more per year from investments to 39.6% from the current 20%.
An additional 3.8% surtax — The Net Investment Income Tax — would also remain in place on top of the capital gains tax. That effectively puts the top federal tax rate on investment income at 43.4%.
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How Would the Tax Increase Be Passed?
The tax hike would be included in the next step of the Biden Administration’s Build Back Better agenda. White House Press Secretary Jen Psaki confirmed the president will outline his “American Families Plan” during a joint address to Congress on April 28.
That plan is expected to fund priorities like paid family leave, childcare, and free community college.
But Psaki declined to confirm reports about the capital gains tax increase saying, “We’re still finalizing what the pay-fors look like”.
Residents of High Tax States Would Be Hit The Hardest
A capital gains tax increase would be felt most severely in high-tax states like New York — where many Wall Street traders live.
The combined federal and state capital gains tax rate for residents of New York would be 52.22% while California residents would face a tax rate of 56.7%.
Both of those are higher than the current combined income tax rate the highest earners pay in those states. New York workers pay a top combined rate of 45.82% while the highest-earning Californians pay a combined rate of 50.3%.
Wall Street quickly reacted to rumors of the tax hike with a selloff Thursday afternoon but seems to be shaking off the concern for now.
But the cryptocurrency market hasn’t bounced back as quickly.
Nearly $200 million has been lost in the crypto market in the past 24 hours. Bitcoin’s value plunged below $50,000 for the first time since early March. Ethereum fell nearly 11% and the recent fan favorite Dogecoin dipped as low as $0.20 per coin — down from its recent high of over $0.40.
But analysts say the full impact hasn’t been felt yet as the markets wait for more information.
When Would The Tax Hike Take Effect?
The biggest question looming at this point is when such a steep increase to the capital gains tax would be implemented.
The Biden Administration has also proposed a large corporate tax increase as part of their infrastructure proposal, The American Jobs Plan, which would take effect January 1, 2022, if passed by Congress.
But it’s unclear if a capital gains tax increase would follow the same path or be retroactive to January 1, 2021.
Let’s take a deeper look at those two scenarios, starting with the latter.
Any type of tax hike to investment profits wouldn’t just impact the big wig investors on Wall Street. Small traders who made big money in the pandemic market would also be strapped with a big tax bill.
If the increase is passed by Congress and put into effect retroactive to January 1, 2021, all investment profits made this year would be taxed at the new rate. That move would give the market an incentive to hold instead of sell.
If passed to go into effect on the first day of the new year, the fourth quarter would likely see lots of selling. Those who hit it big this year would be incentivized to take their profits before December 31, paying capital gains tax at the current 20% rate.
Does The Plan Stand a Chance In Congress?
Though Democrats control both chambers of Congress right now, the majority in the Senate is razor-thin.
Republicans are expected to balk at any proposal to raise taxes, whether that be corporate or capital gains.
But Democrats have a tool to get around opposition from the minority party in the Upper Chamber — budget reconciliation. That process allows the Senate to pass spending legislation by a simple majority vote rather than needing 60 votes in favor.
Reconciliation is how the Democrats passed the latest stimulus bill, The American Rescue Plan.
But it’s not a shoo-in for Democrats yet.
Moderates like Senator Joe Manchin and Senator Kyrsten Sinema have pushed back against plans to hike the corporate tax rate to 28%. At writing, neither Senator had commented on the proposed capital gains tax increase.
What Should Traders Be Watching?
The biggest thing to watch for at this point is more details on the effective date for a capital gains tax increase. Once those details are released, traders should be able to make a better decision on when they should pull their profits and how they want to trade in the future.
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