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How Biden's Capital Gains Tax Plan Differs from Trump’s Plan

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Capital gains are a form of direct tax. They are the profit on the sale of an asset, both movable and immovable. If the asset is held for less than a year, it's taxed as short-term capital gains and added to the marginal income. However, if you hold the asset for more than a year, it gets taxed as long-term capital gains and the taxation depends on your total income. Currently, there are three brackets for long-term capital gains — 0 percent, 15 percent, and 20 percent. The capital gains rates might change if Joe Biden wins the upcoming presidential election. What's Biden's capital gains tax plan and will it impact you? 

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Source: Getty

Biden's capital gains tax rate

Some long-term capital gains are also subject to NIIT (net investment income tax), which means an additional levy of 3.8 percent. This takes the current highest capital gains tax rate to 23.8 percent. As part of Biden's tax plan, he intends to increase the rate to 39.6 percent. While capital gain tax rates have been changed in the past, Biden’s proposed capital gains tax hike is the highest in history in real terms.

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What's Biden's tax plan for capital gains?

A policy document released by Biden in July said, “A guiding principle across our tax agenda is that the wealthiest Americans can shoulder more of the tax burden, including in particular by making investors pay the same tax rates as workers and bringing an end to expensive and unproductive tax loopholes.”

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Under Biden's capital gains tax plan, capital gains for Americans earning above $1 million a year would be treated as ordinary income and attract a tax rate of 39.6 percent. While Biden plans to raise capital gain taxes, President Trump plans to lower them even more. Last month, President Trump said that he wants the highest long-term capital gains taxation at 15 percent.

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The Trump campaign thinks that the tax cuts would encourage investments. “You want to help the blue-collars, cut the corporate tax rate. And I would put the capital-gains rate in that category,” said Larry Kudlow, Trump’s chief economic officer.

However, the Biden campaign doesn't agree. “Donald Trump’s decision to pitch a capital-gain tax cut to benefit the wealthy few, when every other aspect of the economy is in free fall, is a slap in the face to the middle class families struggling to get by,” said Michael Gwin, a Biden spokesman.

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Will Biden increase capital gains?

As part of his $4 trillion tax plan, Biden plans to increase the capital gains tax. Increased capital gains taxation under Biden’s tax plan would also lead to higher taxes on qualified dividends since they are taxed as long-term capital gains.

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Biden might also consider rolling back some of the corporate tax cuts that President Trump’s tax reforms achieved. Incidentally, President Trump’s tax cuts were among the reasons U.S. stock markets rallied during his tenure. While corporate earnings growth has been tepid over the last few years, President Trump’s tax cut helped increase earnings by lowering taxes.

If Biden rolls back some of the corporate tax cuts, it could lead to a stock market crash. However, considering the current soaring fiscal deficit that’s set to reach the highest level since World War II this year and the U.S. debt-to-GDP ratio is slated to exceed 100 percent next year, some fiscal prudence might be warranted.

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