Capital gains tax

No one knows what will come out of the sausage making now going on up on Capitol Hill, but let’s take a look at one proposal to raise money to pay for some of the cost of the reconciliation bill. At the moment, capital gains are taxed only when the asset is sold or the owner dies. (The estate tax is just a tax on capital that is triggered by death rather than by sale.) Oregon senator Ron Wyden proposes that they be taxed every year whether sold or not. Unrealized capital gains are certainly a tempting target. After all, for people like Bill Gates and Jeff Bezos, practically their whole, vast fortunes are capital gains, the cost basis of their stock in Microsoft and Amazon is, at most, a few cents a share.

President Biden wants to nearly double the tax on income from capital gains, currently at 20 percent, to 39.6 percent. Add to that the 3.8 percent Obamacare surcharge and you’re up to 43.4 percent. Many states tax capital gains as well and in 13 of them (plus the District of Columbia) the total tax on capital gains would be over 50 percent with the proposed new federal rate. In California it would be a staggering 56.7 percent. But it gets worse. Unlike the tax on regular income, the capital gains tax is not indexed for inflation. So with long-held assets, much of the gain is illusory. For instance, if you bought an asset in 1971 for $50,000 and sold it this year for $1,000,000, you would owe taxes on a nominal capital gain of $950,000. At 56.