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The Tax Biden Wants to Double and Trump Might Cut

The Tax Biden Wants to Double and Trump Would Slash

Capital gains taxes are the price of making a good investment. They’re levied on profitable stock trades and real estate deals but also can apply to sales of businesses, pieces of art, collectible cars, gold and other assets. President Donald Trump says he would cut capital gains tax bills for investors if he wins a second term, while his Democratic challenger, former Vice President Joseph Biden, would raise money for his domestic agenda in part by doubling the existing tax rate.

1. How are capital gains taxed?

Investors are taxed on the difference between what they paid for the asset and what they sold it for. The federal rate in the U.S. currently tops out at 20%, well below the top marginal rate of 37% on wages and salaries. (Investments held for a year or shorter are taxed the same as wages and salaries.) As with all investments, an additional 3.8% tax applies to capital gains earned by individuals earning at least $200,000 or married couples earning $250,000, to fund the U.S. health-insurance subsidy program known as Obamacare. And a higher 28% capital gains rate applies to transactions involving certain investments in small businesses and in collectibles such as art, antiques, stamps, wine and precious metals. States also tax capital gains but have varying approaches.

2. Who pays them?

Though anybody can have capital gains, it’s generally the very wealthiest of taxpayers who derive the bulk of their riches from capital gains profits on investments. (Capital gains taxes don’t apply to common tax-favored retirement vehicles such as 401(k)s or individual retirement accounts; taxpayers pay ordinary rates on those savings.) More than 59% of taxpayers earning at least $250,000 reported capital gains income in 2017 versus about 15% of those earning $50,000 to $100,000, according to Internal Revenue Service tax-return data. And some low-income taxpayers don’t pay the tax at all: Individuals earning up to $40,000 pay a 0% capital gains rate this year. Homeowners also get a break. The first $250,000 in proceeds from the sale of primary residences are exempt from capital gains taxes for single person, or twice that for a married couple.

3. Are U.S. rates high or low?

The 23.8% top rate (including the Obamacare add-on) ranks among the middle of the pack of countries in the Organization for Economic Cooperation and Development. France, with rates that top out at 30%, has among the highest rates on investments in the world. Some countries, such as Switzerland, have no specific federal capital gains tax but tax the sales at ordinary income rates. Others such as Belgium and Denmark exempt some stock sales held for at least a year from capital gains taxes.

4. Why are capital gains taxed lower than other income?

Proponents of the lower rate say it rewards entrepreneurship and risk-taking and encourages investors to periodically sell what they own, preventing a so-called lock-in effect. (At least some of those proponents advocate no capital gains tax at all.) Critics say that the spread between how wages and investments are taxed can encourage rate arbitrage, creating opportunities for the wealthy to lessen their tax bills.

5. What does Biden say he’d do?

He would would effectively double the rate by subjecting capital gains to his plan’s top marginal rate, 39.6%, for people with incomes of $1 million or more. The general idea is being cheered on by Bill Gates, the billionaire co-founder of Microsoft Corp., who said in a February television interview that “the big fortunes, if your goal is to go after those, you have to take the capital gains tax” and “increase that.”

6. What might Trump do?

Trump says he would reduce the capital gains tax rate to 15% in a second term, should he be re-elected. There has also been periodic chatter in the White House about “indexing” the rate for inflation, which means adjusting original purchase prices upward to minimize the gain on which they are taxed. That change has been a longtime goal of Trump’s top economic adviser, Larry Kudlow, who has said it would spur job creation and economic growth because people wouldn’t be taxed on what he’s called “phantom income.” About 95% of the benefit from indexing capital gains to inflation would accrue to the top 5% of taxpayers, according to the Penn Wharton Budget Model.

The Reference Shelf

  • The Tax Foundation’s summary of Biden’s tax proposals.
  • NerdWallet has a capital gains tax calculator so you know what you’ll owe.
  • Law Firm DLA Piper keeps a running list of capital gain tax rates in different countries.
  • The IRS has a user-friendly guide to capital gains taxes and how to pay them.

©2020 Bloomberg L.P.