Capital gains tax Technology highgrowth stocks could lose out from Biden39;s capital
Capital gains tax Capital gains tax could from out lose … capital Technology, high-growth stocks Biden's
Thu, 22 Apr 2021 12:00:00 -0700
By David Randall, Lewis Krauskopf and Stephen Culp NEW YORK (Reuters) – Wall Street is skeptical President Joe Biden's expected proposal to hike capital
By David Randall, Lewis Krauskopf and Stephen Culp
NEW YORK (Reuters) – Wall Street is skeptical President Joe Biden’s expected proposal to hike capital gains taxes could pass the Senate, but investors see risks that tax-motivated selling could still weigh on technology and other sectors that skyrocketed during the pandemic.
Biden’s proposal calls for increasing the top marginal income tax rate to 39.6% from 37%, and nearly doubling taxes on capital gains to 39.6% for people earning more than $1 million, according to sources familiar with the plan.
While any tax increase will likely be lower than Biden’s initial proposal given the Democrat’s small advantage in the Senate, individual investors who are concerned about rising rates may start to unload shares in order to lock in current rates.
That would disproportionately weigh on technology stocks such as Apple Inc, which is up more than 90% over the last year, and hot growth stocks like Tesla Inc, whose shares have jumped nearly 400% since last April, said Steve Chiavarone, portfolio manager and equity strategist at Federated Hermes.
“There’s a lot of capital gains built into those names, and we think they would be the ones who are most likely to take it on the chin,” Chiavarone said.
High-flying stocks such as Tesla fell nearly 3% on Thursday afternoon following reports of the Biden tax plan. Apple dropped 1%, while Facebook Inc fell 1.5%. The broad S&P 500 dropped 0.9%.
The rally in the U.S. equity market since the start of the year will also likely prompt investors to pause until there is more clarity on the plan, said Oliver Pursche, senior vice president at Wealthspire Advisors in New York.
“Over the last few weeks, the market has shown itself to be out of breath. And this is one more reason for investors to take some profit,” he said.
The S&P 500 is up 10.1% since the start of the year and trades at a price to earnings ratio of 29.9, a valuation level near its all-time highs.
“Some traders are looking for an excuse to lock-in profits and they might choose to use this tax story as their catalyst,” said Ed Moya, senior analyst at FX brokerage OANDA, in a note.
Despite the declines in the stock market on Thursday, many on Wall Street do not expect capital gains taxes to rise substantially given that the Senate is divided with each party holding 50 seats and Vice President Kamala Harris acting as a tie-breaking vote.
“When you have a razor-thin Democratic majority in the Senate, in which if you lose one single senator, tax increases and the likes thereof aren’t going to get through,” said Burns McKinney, a portfolio manager at NFJ Investment Group in Dallas.
Should some capital gains tax increase pass, however, dividend-paying stocks could become more attractive.
“If you do have the capital gains tax go above and beyond that on dividends, it could actually end up favoring dividend-paying equities going forward,” he said.
Qualified dividend income tax rates top out at 20%. The ProShares S&P Dividend Aristocrats ETF dipped 0.7% on Thursday, slightly less than the broader market.
A significant capital gains tax increase would also likely spur a wave of mergers and acquisitions, said Matthew Keator, managing partner in the Keator Group, a wealth management firm in Lenox, Massachusetts.
“People are going to want to seal in lower capital gains rates than they could see in the future,” he said.
Still, the long-term outlook for U.S. equities remains positive, investors said.
Investors who do realize their capital gains now may find a hard time finding other attractive places to put it besides the equity market, said Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago.
Thursday’s sell-off is “not anything that is going to be a long-term disincentive to buy stocks,” he said.
(Reporting by David Randall, Stephen Culp and Lewis Krauskopf; Editing by Sam Holmes)
Capital gains tax
Thu, 22 Apr 2021 12:00:00 -0700
President Joe Biden is expected to double the top long-term capital gains rate to 43
But investors shouldn't necessarily rush for the exits
President Joe Biden is expected to propose doubling the tax rate wealthy Americans pay on investment returns when they sell stocks and other assets.
But investors shouldn't necessarily rush for the exits, according to financial experts.
Under Biden's proposal, the federal capital-gains tax rate would be as high as 43.4% (including an existing Medicare surcharge), according to a Bloomberg report.
“Capital gains would be the highest-tax income we have,” according to Leon LaBrecque, an accountant and certified financial planner at Sequoia Financial Group, based in Troy, Michigan.
Investors currently pay a 23.8% top rate on long-term capital gains.
That includes a 20% capital-gains tax on assets held in taxable accounts for more than a year. It also includes the 3.8% surtax on net investment income, which was created by the Affordable Care Act to fund Medicare expansion.
Under current law, long-term capital gains are taxed favorably with respect to wages. The wealthy pay a top 37% rate on wage income, for example.
The White House plan would instead tax capital gains as ordinary income, at a top proposed rate of 39.6%. It would apply to those with more than $1 million in annual income, according to Bloomberg.
(Short-term capital gains, or those held a year or less, are already taxed as ordinary income under current law.)
The Biden plan would also keep the Medicare surtax in place — creating a top long-term capital-gains rate of 43.4%, according to Bloomberg.
The top long-term capital-gains rate applies to single taxpayers with more than $445,850 of income this year. (It kicks in above $501,600 for married couples filing a joint tax return.)
The Medicare surtax applies to single filers with over $200,000 of income or married couples with $250,000. (These amounts aren't indexed for inflation.)
The tax hike is one part of the administration's push to raise taxes on Americans who earn more than $400,000 a year.
Biden is expected to unveil the proposal next week as a way to fund the American Families Plan, which would expand subsidies for child care and make community college tuition free for all, among other things.
Many aspects of the plan remain unclear, though.
For example, the plan may exempt a certain portion of wealthy investors' capital gains from the higher tax, according to tax experts. It may also exempt certain taxpayers, like some business owners, from the levy.
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It's also uncertain whether Democrats, who have the narrowest of majorities in the Senate, would be able to pass the proposal as written. Even if it passes, the effective date of the tax hike remains unknown.
The S&P 500 erased earlier gains and closed 0.9% lower after published news reports.
“I wouldn't necessarily push the sell button on rumors,” Jack Ablin, chief investment officer and founding partner of Cresset Capital Management, said Thursday on CNBC. “That doesn't make a lot of sense to me.
“There will be plenty of time to plan and respond to any tax or tax proposal that's ultimately in place,” he added.
Sitting tight is likely the appropriate approach for long-term investors, LaBrecque said. Just four years ago, the Trump administration was cutting taxes for many individuals, he noted, as an example of how quickly conditions can change.
“If you know you're going to be sitting on something a long time, don't worry about it,” LaBrecque said of the Biden proposal.
But taxpayers who know they'll be selling a highly appreciated asset next year anyway, for example, should consider doing it now just in case capital-gains taxes do increase, he added.
If a proposal becomes law, it would change financial planning in ways beyond selling investments.
For example, individual retirement accounts and 401(k) plans could become more attractive, since taxpayers wouldn't be subject to the 3.8% Medicare surtax, LaBrecque said. Employees may also be better off getting a cash bonus instead of restricted stock units, he added.
“There are weird aspects to this whole thing,” he said.
– April 22, 2021
biden capital gains tax