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Dems eye pre-emptive capital gains effective date

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Tax Hot Topics newsletter Democratic lawmakers have quietly begun discussing whether to make a proposed increase in the individual capital gains rate effective on the date the proposal is introduced. An immediate effective date would prevent taxpayers from selling assets and engaging in transactions ahead of the rate increase.

President Joe Biden is expected to include a capital gains rate increase along with other individual tax hikes as part of economic and family security legislation to be unveiled as early as this week. The package is meant as a companion piece to the recently released infrastructure proposal, which would raise trillions in revenue by increasing the corporate rate, imposing a minimum tax on book income, and overhauling international tax rules.

Biden is widely expected to propose the 39.6% capital gains rate for income he championed in his campaign platform for income exceeding $1 million, though that will only be the start for negotiations. Many Democrats in Congress support a much shallower increase in the rate. Democrats have been fairly tight-lipped on potential effective dates for all their tax increase proposals. Retroactive increases in tax rates are rare, but not unprecedented. The still fragile economy seems to make them less likely. Treasury Secretary Janet Yellen has signaled a desire to phase in corporate and other tax rate increases prospectively.

The capital gains rate could be an exception. Tying the effective date to the day of introduction would avoid retroactively increasing taxes on transactions that occurred before the change was announced. At the same time, it would prevent taxpayers from immediately engaging in transactions at the current lower rate after learning about the proposal.

The ultimate decision could hinge on how the Joint Committee on Taxation scores the revenue impact of various effective dates, and how well the economy is fairing. Negotiations remain in flux, and proposals should be expected to evolve through the long and contentious legislative process.

Contact:
Dustin Stamper
Managing Director
Washington National Tax Office
T +1 202 861 4144

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