With the upcoming election, investors are closely watching proposals on capital gains taxes from both parties and how they could impact their investments. Democratic presidential nominee Vice President Kamala Harris recently proposed a 28% tax on long-term capital gains for individuals earning over $1 million annually, which is an increase from the current 20% rate. This proposal is different from President Joe Biden’s plan, which calls for a 39.6% tax on long-term capital gains for those earning over $1 million per year. In addition, Harris’ plan includes raising the net investment income tax (NIIT) from 3.8% to 5%.
On the other hand, former President Donald Trump has shown broad support for tax cuts but has not specified a proposal for capital gains taxes. The Heritage Foundation, along with other conservative organizations, developed a plan called Project 2025, which suggests a 15% tax rate for capital gains and dividends, as well as the elimination of the NIIT.
Any changes to capital gains tax rates would require congressional approval, and with the uncertainty of who will control the House and Senate, the outcome remains unknown. To provide some historical context, capital gains tax rates have generally been lower than ordinary income tax rates in recent decades. If enacted, Harris’ proposed 33% combined capital gains rate for top earners would be the highest since 1978.
It’s important for investors to consider the potential “lock-in effect” of capital gains taxes, where higher rates or expectations of lower future rates may influence their decision to sell assets. While proposals for taxing unrealized gains have been discussed, they have not gained widespread support in Congress.
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