In a move that has garnered significant attention, President Joe Biden’s administration has proposed increasing the federal capital gains tax rate to an unprecedented 44.6% for certain high-income individuals. This proposal, which was included in the administration’s budget proposal for the 2025 fiscal year, would mark the highest formal federal capital gains tax rate in U.S. history.
TLDR
- President Biden has proposed increasing the federal capital gains tax rate to 44.6% for certain high-income individuals, which would be the highest rate in U.S. history.
- The proposed 44.6% rate would only apply to individuals with taxable income above $1 million and investment income above $400,000.
- The proposal aims to raise the top ordinary income tax rate to 39.6% and increase the net investment income tax rate by 1.2 percentage points, which combined would result in the 44.6% rate.
- The proposal is targeted at ensuring high-income earners contribute a fairer portion of their income in taxes relative to their financial undertakings.
- The high proposed tax rate may incentivize some affected individuals and businesses to explore investing in cryptocurrencies as a way to potentially avoid such high taxation.
The proposed 44.6% rate is not a blanket increase but rather a combination of two separate proposals. The first proposal aims to raise the top ordinary income tax rate to 39.6%, while the second proposal seeks to increase the net investment income tax rate by 1.2 percentage points for individuals with investment income above $400,000.
Together, these two proposals would effectively increase the top marginal rate on long-term capital gains and qualified dividends to 44.6%.
It’s important to note that this historically high rate would only apply to a specific subset of taxpayers. According to the proposal, the 44.6% capital gains tax rate would only affect individuals with taxable income above $1 million and investment income exceeding $400,000.
For the vast majority of taxpayers, including most crypto investors, the proposed changes would likely have little to no direct impact.
The primary objective behind this proposal appears to be ensuring that high-income earners contribute a fairer portion of their income in taxes relative to their substantial financial undertakings.
Currently, American billionaires pay an average individual income tax rate of just 8.2%, a figure that the administration likely views as disproportionately low given their immense wealth.
It’s difficult to describe how insane a 25% tax on unrealized capital gains is.
Not a one-time 25% hit. It’s compounding, annually taking 25% of every dollar of potential increase before it can grow.
Not an exaggeration to say it could single-handedly crush the economy.
I will… pic.twitter.com/fSrYzNSGeV
— Jason A. Williams (@GoingParabolic) April 25, 2024
Matthew Walrath, founder of Crypto Tax Made Easy, emphasized that the proposal is unlikely to affect the average crypto investor.
“For 99.9% of people, it’s a big, fat nothing burger because it’s essentially just a proposal,” Walrath stated, adding that the proposed rate is primarily targeting ultra-high-income earners.
While the proposed capital gains tax rate increase may not directly impact most individuals, it has sparked concerns among some businesses and high-net-worth individuals who could potentially be affected.
In response, some have suggested exploring alternative investment options, such as cryptocurrencies, as a means of potentially avoiding such high taxation.
Cryptocurrencies, which operate outside of traditional financial systems, have often been viewed as a way to potentially circumvent certain tax obligations.
However, it’s important to note that the Internal Revenue Service (IRS) has been actively working to regulate and enforce tax reporting requirements for cryptocurrency transactions.
In fact, the IRS recently released an early draft of a new tax form, dubbed 1099-DA, specifically designed to facilitate the reporting of crypto transactions and associated tax liabilities.
The form aims to simplify the process by requiring taxpayers to provide information such as token codes, wallet addresses, and transaction details.
As the debate around the proposed capital gains tax rate increase continues, it’s clear that the administration’s goal is to ensure a more equitable distribution of the tax burden, particularly among the wealthiest individuals.
The potential impact on economic growth and investment patterns remains a point of contention, with some arguing that such high tax rates could stifle innovation and entrepreneurship.
