What will happen with Capital Gains Tax?

This has been one of the major topics of discussion in 2021.

President Biden proposed that the current capital gains rate be increase from a preference 20%  rate to ordinary income tax rates at a maximum rate of 39.6%. This would apply to married individuals with earnings over $1 million (presumably including all income including capital gains). The proposal will also eliminate 1031 exchanges after 2021 and subject all gains to the net investment income tax (NIIT) of 3.8%.

The Biden capital gains tax increase proposal set the effective date for this increase on transactions after April 27, 2021. Yes, earlier this year.

Since the path has been cleared with the House to take up the budget bill, it appears this proposal may have significant merit and probability of passage. Although , we don’t know the specific outcome it is not outside the realm of possibility that a capital gains tax increase is passed with a retroactive date.

We don’t know the specifics or the outcome, but there are only three possible outcomes.

  1. Capital gains rates do not increase.
    1. We don’t think this is likely since there will be pressure to raise taxes on the rich while paying for increased social programs.
  2. Capital gains tax is increased but not until after the end of 2021 (prospectively).
    1. We don’t believe any capital gains tax increase will have a prospective date since the risk to sell off of the Dow would create significant market volatility and adverse immediate economic impacts.
  3. Capital gains tax is increased prior to the date of enactment
    1. We believe this is the most likely outcome, maybe at a rate less than ordinary income tax rates and more likely a date closer to date of enactment instead of an April 2021 date.

If you are in the process of incurring large capital gains before year end, it is imperative to start planning for the possibility that capital gains tax may have already increased.

We have been diligently working on multiple strategies including deferred sales trust design, structured installment sales and the like to help mitigate the burden of these proposed new laws. We will continue to monitor these developments and develop strategies to help minimize the tax impact.

Please contact us if you are planning on a large capital gain before year end.


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