There has been a lot of talk lately about capital gains taxes. An investor will buy an asset at one price and sell it at a higher price for a profit. This profit is called a capital gain. These capital gains are subject to taxation by the IRS. Depending on how you manage your investments, your decisions could significantly impact your portfolio.
What are capital gains taxes?
Capital gains come from the sale of an asset, such as stocks or real estate. Assets will not incur taxes until they are sold or realized. There are two types of capital gains: short-term and long-term.
- Short-Term Gains
Short-term capital gains taxes are levied on the profits from the sale of an asset held for one year or less. These gains are taxed at the same rate as your ordinary income depending on the marginal tax bracket you fall under. Capital gains could also push you into a higher tax bracket as it increases your income.
- Long-Term Gains
Investments held for more than a year are considered long-term and are generally taxed less than ordinary income. High earners may also be subject to net investment income tax (NIIT), an additional 3.8% tax that people at a certain income level must consider.
Proposed capital gains tax rate increases
Over the past year or so, the financial world has been abuzz with different proposals put forth regarding increasing the capital gains tax. For those who invest their hard-earned money, this news is likely unsettling. Early on, there was talk that the proposed capital gains tax rate increase would double from 20% to nearly 40%. Though not completely eliminated, that talk has cooled some. However, there is still a proposal on the table of a possible increase of around 28% for individuals who earn over $1 million or more.
For ultra-high-net-worth individuals, there is a proposed change to the capital gains tax in the fiscal year 2025 budget that may be of some concern to certain investors. The proposed change suggests a modification requiring individuals with a net worth above a specified amount to pay a minimum tax on their unrealized capital gains from assets such as stocks, bonds, or privately held companies. This differs from current capital gains tax laws where taxpayers pay taxes on realized gains. If passed, some may worry this could create a precedent for the future that could impact investors at any income level.
Potential impact of capital gains tax increase proposals
Pros
- According to the Joint Economic Committee, there are no real benefits to investors, across the income spectrum, regarding the increase of capital gains taxes.
Cons
- Capital gains tax increases raise the cost of capital, decreasing investments and hindering economic growth, including:
- Decreasing real gross domestic product (GDP).
- Potentially hurting the jobs market.
- Decreasing real business spending.
- Taxpayers would pay capital gains on illusory, inflation-generated gains.
- Early economist, Adam Smith wrote in 1776, “A tax which tended to drive away stock from any particular country would so far tend to dry up every source of revenue both to the sovereign and to the society.” He was trying to make the point that too much tax on capital gains has a greater effect on society than just who (the wealthy) is being taxed.
- According to the Joint Economic Committee, increasing capital gains tends to drive down wages as well as the general standard of living.
Capital gains tax strategies to consider
- Hold onto your investment for over a year to prevent the profit from being taxed as regular income.
- Don’t forget about tax-advantaged accounts such as Roth IRAs.
- Your investment losses can be deducted from your investment profits to lower your income by up to $3,000 annually.
- Look into exclusions that may allow you to exclude a portion of gains from the house sale.
- Talk with a financial professional regarding your concerns.
Discuss capital gains taxes with your financial professional
If you are an investor concerned about capital gains, consider reaching out to your financial professional to discuss the potential changes to capital gains tax rates and to help you develop or modify strategies to prepare for whatever legislation gets passed. It may be helpful to create a list of the pros and cons of a capital gains tax increase and going over it with your financial professional.
Sometimes people view trading as a way to make a quick buck by buying low and selling when the price is higher than when you bought it. However, if you fail to take into account the capital gains implications, a large chunk of your profits could be lost. This is one of the many risks involved when it comes to investing. Remember, there is no guarantee you will make money and some loss is to be expected. Working with a financial professional can be a beneficial approach to help mitigate some of the risks. Don’t wait, schedule that consultation today!
Sources:
Harris Unrealized Capital Gains Tax Proposal: Details & Analysis (taxfoundation.org)
DeepDive: The capital gains tax hike will hurt the middle class too - The Hub
Kamala Harris Golf Tax and Unrealized Gains? What You Really Need to Know | Kiplinger
Important Disclosures
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax professional.
This article was prepared by LPL Marketing Solutions.
LPL Tracking #629416
