Donald Trump has finally conceded, and president-elect Joe Biden is to be inaugurated on Jan. 20. Biden is expected to reverse course on many of Trump’s economic and political policies. In contrast to the Trump administration, which favored fiscal easing and tax cuts, the Biden administration is expected to hike taxes. Will Biden raise capital gains tax? If so, what would it mean for U.S. stock markets and the economy?
The Biden administration’s policies on green energy and marijuana legalization are also likely to be different from the Trump administration's. In fact, green energy and marijuana stocks have been rallying in anticipation of favorable policies. However, Biden’s tax plans could put a damper on markets.
What's capital gains tax?
Capital gains tax is a form of direct tax. In simple terms, it's the tax on the gains you make on any capital asset, such as stocks or property. Capital gains tax can be either short or long term. Typically, short-term capital gains come into the picture if you sell an asset within a year of buying it. If you hold an asset for more than a year, it would be subject to long-term capital gains tax.
The taxation is lower for long-term capital gains than for short-term capital gains. For short-term capital gains, the gains are added to your income and taxed. Currently, income tax rates in the U.S. are between 0 and 37 percent, depending on your filing status and total income.
Biden should focus on equalizing capital gains tax rates with ordinary (labor) income tax rates, and eliminating cap gains loopholes (carried interest, step up basis on death/donation). Raising corp tax rates is shooting ourselves in the foot.— Ivan the K™ (@IvanTheK) July 9, 2020
Where does long-term capital gains tax currently stand?
Long-term capital gains are taxed at 0, 15, and 20 percent. The rate would depend on your total taxable income and filing status. For instance, for single taxpayers, long-term capital gains tax is 0 percent for income below $40,400, 15 percent for income between $40,401 and $445,850, and 20 percent for income above $445,850.
Will capital gains tax be due at the same time as estate tax?
In his policy document, Biden talked about raising estate taxes to historical levels. Estate taxes apply when a property is transferred from a deceased person to an heir. However, very few people pay estate tax due to several exemptions and loopholes—it's estimated that only about 2,000 people in the U.S. pay estate tax in a year. Meanwhile, capital gains are not due at the same time as estate tax. Capital gains would apply when the heirs sell the inherited property.
How and why Biden wants to raise capital gains tax
Biden wants to raise taxes for two reasons. In a policy document from July 2020, Biden stated, “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.”
Also, U.S. federal debt has ballooned after the government doled out massive stimulus to address the COVID-19 pandemic. The U.S. will eventually have to raise taxes to compensate for this. All said, while Biden’s tax hikes could be short-term pain for stock markets, they could be the proverbial “bitter medicine.”