American investors in the top tax bracket currently pay a rate of 23.8% on the capital gains of long term stock. This rate is significantly lower than what these same taxpayers owe for their regular income tax— which incentivizes investors to hold stock for at least one year or more.
According to the proposed Biden tax plan that aims to support both the American Jobs Plan and American Families Plan, Americans making over $1 million in adjusted gross income, or $500,000 for married filing separately, would face a capital gains tax rate of 39.6%, equivalent to the proposed regular income tax rate.
No Incentive for Investors Holding Stock
This proposition leaves no incentive for high-earning investors to hold stock for any period of time as it would be taxed at the same rate no matter what. If passed, these changes would be retroactive to the announcement date which was April 28, 2021.
Bruce Brumberg, of mystockoptions.com, advises,
“With incentive stock options (ISOs) taxation, when you hold the shares more than two years from grant and one year from exercise, the full gain at sale over the exercise price is capital gain. While the tax treatment for NQSOs is fixed at exercise, for ISOs when you sell the stock without meeting the holding periods the tax treatment changes to essentially follow the ordinary income rates. Anyone with annual income of more than $1 million will want to evaluate whether to risk holding ISO shares for the long-term capital gains rate when that rate would actually, under Biden’s plan, match their ordinary income rate.”
Investors interested in preserving the profitability of capital gains are turning to IRS Section 1202 and the benefits of QSBS which allows for 50%, 75%, or even 100% exemption of capital gains from taxable income on the sale of qualified stock.
QSBS Expert provides resources to orient you to the benefits and limitations surrounding qualified small business stock. Visit our webpage to explore this investment opportunity.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.