A Different Type of Tax
Since Democrats have control of Congress and the Executive Branch, increasing taxes is going to be an obvious decision. Donald Trump, in 2017, decreased taxes heavily, and it has stayed the same until now. With Democrats looking for ways to fund government initiatives such as the infrastructure bill and Joe Biden’s extension of the Affordable Care Act, taxes are a simple way to fund them. However, Biden could be exploring a different type of tax, one some of us might be very familiar with, a capital gains tax.
For those that don’t know, a capital gains tax is a fee the government taxes on the growth of an investment when sold. When you sell a positive investment, your gains are now realized, leaving them to be taxed. Only realized gains can be taxed, so if you currently have an open investment that is positive, that will not fall under the capital gains tax. However, your investments are also taxed on what type of investments they are: short-term investments and long-term investments. Any investment held over one year is considered a long-term investment, while others are considered short-term investments. This is the exact reason that day-trading is often frowned upon. Short-term gains are considered ordinary income, and taxed as such, leaving them with tax rates as high as 37 percent. On the other hand, long term gains are treated better with tax rates of 0 percent, 15 percent, or 20 percent, depending on your tax bracket. All in all, these taxes are simply used as more funding for programs.
On Thursday, it was reported that President Biden was looking to nearly double the capital gains tax percentage to 39.6 percent. More specifically, this is for the highest tax bracket, which currently has a 20 percent tax. You may be asking, why would he do this? Biden has already planned to increase corporate taxes for the infrastructure plan, so increasing them more is a terrible option. Instead, the proposed increase in taxes is to fund the American Families Plan, a program that looks to help households recover along with the economy, especially children.
The stock market’s reaction? The news sent the indices into a bloodbath, sparking a swift selloff that left the S&P 500 down nearly 1 percent. Capital gains taxes also provide a new level of risk as it could divert investment from the stock market, which is never a good thing. However, this could easily be classified as an overreaction as Biden’s plans are set to help the economy in the long run. Do you support the increase in capital gains tax?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
