Capital Gains: A Century-Old Tax Break Gets a Rush of Attention

In late May, the Biden administration released details of its proposals to boost taxes on Americans’ long-term capital-gains income above $1 million by 82%.

Soon after, the investigative site ProPublica published an article, based on IRS data it says it obtained, contending that the richest Americans don’t pay their fair share of taxes, and that involves capital gains as well.

Then in mid-June, a New York Times article reported that the private-equity industry, through clever planning and political muscle, can often treat its managers’ compensation as long-term capital gains.

This torrent of attention makes it a good time to review the complex, highly charged topic of income taxes on capital gains, especially as current proposals could affect some filers who aren’t among the wealthiest.

Capital gains are the difference between the original cost (plus adjustments) and the selling price of assets such as stock shares or real estate, if there’s a profit.

Also for a century, the tax code has exempted capital gains at death from income tax, a benefit known as the “step-up in basis.”.

Long-term gains also have other tax advantages, such as the ability to reduce or eliminate income from taxable gains by deducting capital losses on unprofitable investments.

But the most powerful benefit of capital gains, say tax specialists, is that investors can choose when to have taxable income by timing their sales—and that could be never, if they hold assets until death.

Pomerleau advocate taxing capital gains at the same rates as ordinary income such as wages, although Mr.

According to estimates by the staff of Congress’s Joint Committee on Taxation, filers with $1 million or more of income, about 715,000 taxpayers, will report nearly 70% of total long-term gains this year.

The Committee staff estimates they’ll pay 53% of total income taxes in 2021, which includes tax on income other than capital gains, and income taxes provide nearly half of U.S.

A major reason for the disparity is that taxpayers don’t have capital-gains income on assets they don’t sell, prompting politicians like Sens.

President Biden’s current proposals don’t include a wealth tax, but they do raise rates on long-term gains.

The proposals would also end the tax exemption for capital gains at death.

These changes plus some others would raise taxes substantially for the highest earners: The Tax Policy Center estimates that about one million tax filers with income between $817,000 and $3.6 million would owe an average of $43,000 more tax for 2022, and 120,000 households with income above $3.6 million would owe an average of $1.3 million more.

Using data from the Federal Reserve, Tax Policy Center specialist Robert McClelland estimates there are roughly 350,000 filers age 70 and older with income below $400,000 but enough capital gains on unsold assets to qualify for the higher rates if they have the same amount of assets at death.