If you’re still trying to catch up with all the changes brought about by the Tax Cut and Jobs Act, then you might want to have a seat. That’s because republican lawmakers aren’t done yet. At least, they don’t want to be. Lawmakers in Washington have been busy working on a second wave of tax cuts, informally known as Tax Reform 2.0.
So what does that mean for capital gains taxes?
Is Congressional Approval Necessary?
Actually, the Tax Reform 2.0 doesn’t even mention capital gains taxes, but that doesn’t mean the president and other lawmakers aren’t looking at them. In fact, Treasury Secretary Steven Mnuchin said as recently as last month that the Treasury Department could possibly make a big change to capital gains taxes without approval from congress. So is that a realistic possibility and if so, what would it mean for investors?
What Are Capital Gains?
Capital gains are very simple. Any money you make on a stock you sell is considered a capital gain. Buy a stock for $1,000 and sell it for $10,000, you have a capital gain of $9,000. Taxes on capital gains aren’t quite as simple. A lot depends on how long you’ve owned the stock before you sell it. That’s where short term and long term capital gains come into play. If you own it for a year or less, it’s a short-term gain and you pay a higher tax percentage. If you own it for more than a year it’s a long-term gain and your tax rate is much lower.
Indexing Capital Gains for Inflation
Here’s how the president would like to change capital gains taxes. The administration has proposed a change that would index the cost basis of investments for inflation when calculating capital gains. For example, if you purchased $5,000 in a stock three years ago, and the consumer price index (CPI) increased 10 percent, then your cost basis in that stock would change to $5,500 when you tally your capital gains.
Investors Win Big
This proposed change could end up lowering investors’ capital gains taxes significantly. The savings would be even bigger on long-term capital gains. While the proposed changes could save investors big-time, the current structure of the capital gains tax would not change. The tax percentages would not change, nor would the time frames of short and long-term gains. The calculation method used to determine the amount of the gain is what would be different.
Another Big Hit to the Deficit
Proponents say this method would be a fairer way to tax profits from investments. On the other hand, opponents claim the proposal would further add to the nation’s deficit, as an extra $100 billion in tax revenue would be lost over the next 10 years. The Tax Cut and Jobs Act is already expected to add $1.9 trillion to the deficit over that same time period. Additionally, the proposed change would essentially help the wealthy and no one else.
Keep an Eye Out
It remains to be seen if this latest tax change will move forward. But the fact that it’s on the president’s radar means it bears watching.