Harris Tax Proposal (part 2)

Harris Tax Proposal (part 2)

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Capital Gains Tax

1.????? Long Term and Short Term Capital Gains taxed as ordinary income (Income over $1mm).

2.????? Taxation of Unrealized Capital Gains (impacting people with net worth over $100mm)

Before we dig into these two topics, we need to review the current taxation of capital gains. Currently, there are short term and long term capital gains. Short term capital gains occur when an investment has been held for less than 1 year. Long term capital gain treatment is for investments held for longer than one year.

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All Capital Gains taxed as Ordinary Income (income over $1mm)

????????????? Logistically this would not be hard to implement. The tax return clearly spells out someone’s income. This is also not as detrimental as some people are making it out to be.

1.????? Capital Gains still need to be realized for them to be taxed.

2.????? Short Term Capital Gains are already taxed as ordinary income.

3.????? This impacts less than 1% of people

4.????? There was no mention of qualified and non-qualified dividends. Qualified dividends get long term capital gains treatment and Non-Qualified Dividends get short term capital gains treatment.

All things considered, this does not seem like such a big deal. If you are pairing tax planning with investment planning, then you can reduce the impact of capital gains. Ongoing tax loss harvesting of brokerage accounts, Direct Indexing strategies that are designed to give index based returns with systematic ongoing tax loss harvesting, 1031 exchanges for real estate, Qualified Opportunity Zones that provide the ability to defer gains for an extended period of time. These are just some examples of ways to proactively work towards reducing the impact of capital gains.

A bigger tax “penalty” is an even bigger incentive for people to buy and hold investments. This would likely add some additional stability to the equity and bond markets.

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Taxation of Unrealized Capital Gains (net worth over $100mm)

????????????? Logistically this would be a nightmare to implement. Assets that are marked-to-market will be easy enough to value on 12/31 of each year. Real Assets will be a lot more difficult because the would all have to be appraised. Auditing the net worth of people that have many properties and businesses would be extremely time consuming and expensive.

1.????? This only applies to people with a net worth over $100mm

2.????? The biggest beneficiaries of this change would be appraisers.?

3.????? The value of an apartment building or an office building is more of a range than an exact value. As illiquid as a home can be, these bigger buildings can sometimes be nearly impossible to value.

4.????? alternative investments might re-price quarterly or annually. Will there be a mandated additional appraisal of assets on 12/31? A lot of these investments are also illiquid for a number of years, so paying taxes on unrealized gains would not be as easy as just selling some shares.

5.????? The cost of auditing people is going to be extremely expensive

6.????? This might de-stabilize the equity and bond markets because people will have to sell assets in order to pay taxes on their unrealized gains.

7.????? THIS ONLY APPLIES TO PEOPLE WITH A NET WORTH OVER $100MM.

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Conclusion

·?????? Changing the capital gains tax treatment to all ordinary income for people with over $1mm in income is likely a non-event. You generally have a lot of control over when you realize capital gains, and you can also build up capital losses to offset future capital gains.

·?????? Taxation of Unrealized Gains for people with a net worth over $100mm would be a nightmare to enforce and would likely lead to instability of the investment markets.

·?????? Remember that the percentage of people into the country that fall into these groups are a fraction of 1%, so most people are worrying about these proposals for no reason.

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These hypothetical examples are for illustration purposes only. NEXT Financial Group, Inc. does not provide tax or legal advice. For such guidance, please consult your tax or legal professional. Feel free to contact me with questions.