Considering the Impact of Capital Gains Tax on Business Sales and Mergers

President Biden's FY 2025 Budget proposal has ignited significant debate, particularly surrounding the proposed increase in capital gains rates, which could reach a headline rate of 44.6%—the highest in federal history. However, as with any tax proposal, the implications are complex and merit careful consideration.

Capital gains are profits from asset sales such as businesses, stocks, and real estate, taxed based on income, asset type, and holding period. Currently, long-term gains are capped at 20%, but Biden's plan seeks to revise this rate.

Many business owners are now weighing the option of exiting before the potential change in capital gains rates. Biden's budget suggests raising the top long-term capital gains rate to 39.6%, with additional levies like the 3.8% Net Investment Income Tax and Medicare taxes potentially pushing it to 44.6%. While this targets high-income earners, specific conditions and exceptions complicate its application.

A higher capital gains tax rate could lead to reduced asset turnover, impacting market liquidity and capital formation. Business owners are concerned that waiting to sell until after the potential implementation of Biden's plan could result in higher taxes. This concern is heightened in an election year, adding further uncertainty to the proposal's future.

Critics argue that increased taxes might discourage investment and innovation, highlighting concerns about double taxation on capital gains and potential capital flight to jurisdictions with lower tax rates.

Biden's proposal is currently in its early stages and faces legislative hurdles in a politically divided environment. As discussions evolve, stakeholders are advised to stay informed, explore tax planning strategies, and monitor legislative developments closely. Ultimately, while the proposed 44.6% rate captures attention, its actual impact will depend on the final details yet to be determined.