At myStockOptions, we are listening for policy hints from the Democratic presidential candidates that may affect equity compensation if Democrats regain control of the White House and Congress in 2020. This includes the potential for changes in the long-term capital gains tax, a stated goal for several of the Democratic candidates.
Capital Gains Tax: A Review
Capital gains on asset sales are often still associated with the wealthy and not the middle class. However, anyone who sells a house is subject to the tax rules of capital gains and losses. Anyone who sells stock, ETF holdings, or mutual funds in non-retirement brokerage accounts incurs a capital gain or loss. Nowadays, that's not just the wealthy. For example, an employee incurs a capital gain or loss when selling company shares acquired from stock option exercises, restricted stock/RSU vesting, or ESPP purchases, even if the number of shares is small. Capital gains tax has therefore become a commonplace feature of individual taxation for many US citizens, not just the wealthy minority.
While the Tax Cuts and Jobs Act made significant changes in the rates and brackets of income tax in 2018, it did not modify the long-term capital gains tax rates (15% and 20%) that apply to gains from shares acquired from stock compensation and held for at least one year. Those rates have been in place for many years.
However, if Democrats win the presidency and a workable majority in Congress, we should expect changes in the long-term capital gains tax as part of Democrat efforts to increase federal revenue and reduce income inequality. This is clear from statements made by Democratic candidates, the tax-policy positions they have issued, and research from other sources (see commentaries from Politico, The Hill, and Kiplinger). If your decisions at year-end on whether to hold or sell investments tend to be tax-driven, you could be very busy in December 2020.
Democratic Presidential Candidates: What They Are Saying
Below is a sample of specific policies for capital gains tax that Democratic presidential candidates have proposed:
- taxing capital gains income the same as compensation income (Cory Booker, Amy Klobuchar, and others)
- increasing the capital tax rates for incomes over $1 million (Joe Biden)
- eliminating the lower capital gains rates for those with household income above $250,000 (Bernie Sanders)
- a wealth tax for the richest top 0.1% that in essence taxes the gains on assets before any sale proceeds are realized (Elizabeth Warren)
- ending the step-up at death in the basis of inherited assets
Meanwhile, as we discussed in a recent blog commentary, the Trump White House is pulling in the opposite direction on capital gains. It is seriously considering a presidential executive order which would index the capital gains cost basis for inflation. That would effectively result in a tax cut—controversially, without the approval of Congress. It seems that the future of capital gains taxation could take a very different path if the Democrats do not regain the White House in 2020.
Varying Approaches To Capital Gains Taxation
While most of the Democratic candidates appear to support eliminating the different tax rates that apply to long-term capital gains compared to compensation income, those policies might not mean all the gain would be taxable. There could be an income-exemption amount for a certain percentage of gains. No candidate has mentioned this approach, which was actually part of the US tax code before the Tax Reform Act of 1986. Tax exemptions on a certain percentage of capital gains are applied by several other countries now. For example, in Canada, only 50% of capital gain is included in income, and it's then taxed at the individual's income tax rate.
Interestingly, tax policies in countries around the world embrace the rationale that capital gains should be taxed differently than employment income. For example, that is the case in Denmark, Sweden, and Germany, countries that have more progressive social-welfare programs and less income inequality than the United States. (You can sample other tax treatments of capital gains and equity compensation around the world in the Global Tax Guide at myStockOptions.com.)
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