U.S. Vice President Kamala Harris in Milwaukee, Wisconsin, U.S. August 20, 2024 and former U.S. President Donald Trump in Bedminster, New Jersey, U.S., August 15, 2024 are seen in a combination of file photographs.
Marco Bello | Jeenah Moon | Reuters
As the election ramps up, many investors are focused on capital gains taxes and how proposals from both parties could affect their assets.
Democratic presidential nominee Vice President Kamala Harris last week proposed a 28% tax on long-term capital gains, or profits from the sale of assets owned for more than one year, for those making more than $1 million annually. The plan would raise the top rate from 20%.
“I would go higher than that,” Sen.Bernie SandersI-Vt., on Sunday told NBC’s“Meet the Press” of Harris’ proposal. “I think she’s trying to be pragmatic and doing what she thinks is right in order to win the election.”
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Harris’ plan veers from President Joe Biden‘s 2025 fiscal year budget, which calls for 39.6% long-term capital gains taxes for those earning above $1 million per year.
Her plan would also raise the net investment income taxor NIIT, from 3.8% to 5%The Wall Street Journal reported last week. Biden’s 2025 budget has the same NIIT increase for those with modified adjusted gross income, or MAGI, over $400,000.
Under current law, the NIIT applies to certain investment earnings once MAGI exceeds $200,000 for single filers or $250,000 for married couples filing together.
If Harris proposes raising the NIIT to 5%, the combined rate would be 33% for top earners. Biden’s plan would raise the combined rate to 44.6%.
The Harris campaign did not immediately respond to CNBC’s request for comment.
Meanwhile, former PresidentDonald Trump broadly supports tax cuts but hasn’t outlined a capital gains tax proposal.
The issue was addressed inProject 2025a “vision for a conservative administration”created byconservative think tank The Heritage Foundation with more than 100 other right-leaning organizations.
Project 2025 called for a 15% tax rate for capital gains and dividends. The collection of proposals would also abolish the NIIT.
Several Trump officials have beendirectly affiliated with Project 2025but he has distanced himself from the plan.
The Trump campaign did not immediately respond to CNBC’s request for comment.
Of course, capital gains tax changes in either direction would require congressional approval, and control of the House and Senate is uncertain.
Here’s how the candidates’ proposals compare with past capital gains tax rates.
History of capital gains tax rates
In recent decades, capital gains tax rates have generally been lower than “ordinary income” or regular income tax rates, according to the Tax Foundation.
“We’ve applied preferential rates to qualified dividends and long-term capital gains, and that rate has trended downward over time,” said Garrett Watson, senior policy analyst and modeling manager at the Tax Foundation.
If enacted, Harris’ combined 33% capital gains rate for top earners would be the highest since 1978, when the rate was close to 40%, he said.
Harris’ 28% top capital gains rate, excluding the NIIT, would mirror the top rate enacted by former President Ronald Reagan in 1986, which temporarily matched the ordinary income rate.
After tax cuts from former President George W. Bushthe top capital gains tax rate dropped to 15% from 2003 through 2012. That rate was the lowest since the Great Depressionaccording to the Tax Policy Center.
However, capital gains revenue is more volatile than regular income tax collections because it’s influenced by when investors sell or “realize” profits, Watson said.
“It creates a lot of uncertainty for policy wonks who are trying to generate revenue estimates for these proposals,” he added.
To that point, the average effective tax ratesor percentage of taxes paid, have been lower than the maximum capital gains rates, according to the Tax Foundation.
Capital gains taxes can have a ‘lock-in effect’
Generally, investors can choose when to sell assets and incur capital gains taxes. Higher rates or lower future rates can prompt investors to defer sales, experts say. Alternatively, investors will strategically realize gains in the 0% bracket, depending on their current taxable income and long-term goals.
For 2024, investors pay 0%, 15% or 20% capital gains taxes, plus 3.8% NIIT for higher earners.
“There’s no question that there’s a lock-in effect associated with capital gains, and that will go up with a higher rate,” said Kent Smetters, a professor of business economics and public policy at the University of Pennsylvania’s Wharton School.
Although there have been proposals to tax unrealized gainsthose plans have failed to reach broad support in Congress.
