Summary
It has become standard practice in the United States to tax long-term capital gain at a lower rate than ordinary income. The previous Biden administration proposed raising the capital gains rate to be on-par with the top rate on ordinary income. Former President Biden also proposed increasing the tax rate on net investment income and applying it to active business owners, including real estate professionals.
RER encourages Congress to continue to support investment and job creation with a meaningful capital gains incentive.
Key Takeaways
A tax on unrealized gains would require the IRS to police households as they identify, tabulate, and value all their worldly possessions. The tax would thrust the IRS into a new and unwelcome role. The agency would become a permanent, live-in accountant and watchdog over every aspect of household finances, consumer activity and economic life.
Unlike other tax policies, such as immediate expensing, the capital gains preference only rewards smart, productive investments that generate profits.
The reduced capital gains rate partially offsets the higher risk that comes with illiquid, capital-intensive real estate projects, as well as the economic effects of inflation.
High taxes on capital income make it harder to attract the investment needed to rebuild our urban centers. Opportunity Zone capital gains incentives facilitated $75 billion in new investment in low-income communities in the first two years after enactment.
See the full fact sheet.
Maintain a Reduced Tax Rate on Capital Gains: The current structure decreases the cost of capital, drives long-term investment, encourages productive entrepreneurial activity, draws investment from around the world, and increases U.S. workforce productivity and competitiveness.
Reward Risk-Taking: Current law on capital gains encourages taxpayers to put capital to work on projects that won’t pay off for many years. By taxing business assets and investments annually, a tax on unrealized gains would remove one of the major incentives for patient, productive capital investment.
Preserve the Integrity of Our Tax System: A proposed tax on unrealized gains is quite possibly unconstitutional. Supreme Court jurisprudence has applied a realization requirement to determine whether gains or profits constitute income taxable under the 16th Amendment.
Proposed Changes to Capital Gains