Biden proposes to increase the capital gains tax rate on the wealthy – How could this impact stocks?

They say only three things in life are inevitable – death, taxes, and arguments about what those taxes should look like.

Joe Biden is expected to release a proposal to nearly double the capital gains tax rate on the wealthy. No surprise, the wealthy are panicking but should The Average Joe?

Are you the 1% or the 99%?

You as the investor will often pay capital gains tax on any investment gains (with the exception of tax-preferred accounts). With the new changes, you’ll now be paying more taxes IF you make over $1m.

There are two major expected changes to tax rates:

• 39.6% capital-gains taxes for those earning over $1m – up from a top rate of 20% before
• 39.6% top income tax rate – up from 37% before

With the US Senate divided 50-50, the law isn’t a sure thing and investors can expect negotiations between Biden and the Republicans. But one possibility is a compromise to increase the tax rate to a lower rate.

The changes would affect 3 out of every 1000 American taxpayers, according to White House press secretary, Jen Psaki. While the tax will mainly impact the 1%, those making under $1m could be impacted in other ways…

Making less than $1m? Here’s how you could be impacted…

The tax hike could force investors to dump stocks right before the tax increase — leading to a drop in stock prices

With anything tax-related, there’s no shortage of debates… On the opposing side, a tax increase could…

• Lower stock prices — leading to lower investment gains and lower tax income for the government.
• Discourage entrepreneurs from starting new businesses — which would make the US less competitive in the long run.

For investors… What does history tell us about a capital gains tax rate increase?

Upon the initial reactions, stock markets fell more than they did in over a month. But markets quickly recovered in the following days. Here’s what history has shown in past capital gains tax increases…

• In the past 3 periods when capital gains tax rates were raised, stocks fell before the tax increase but continued to go up afterward.
• Momentum stocks — those that have moved up the most in recent months — are sold the most before an increase, according to Goldman analysts.

Wealthy investors have reasons to be upset should the proposal pass… But for The Average Joe, the impact could be minimal.

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