Here is this weeks video
One of the main reasons I sold my stock holdings earlier this year was Capital Gains taxes. My entire portfolio was long-term gains with profits well over 150%. Part of the democrats election platform called for elimination of the long-term capital gains tax rate of 20%.
The democrats are this week addressing financing the $3.5 Trillion “Infrastructure” bill, of which only $150 Billion (6%) is actually for roads and bridges (which is traditional infrastructure.) They are selling it to us as essential given the flooding from hurricanes Henri and Ida, but the fact of the matter is that they are financing their agenda of social programs while calling it “Infrastructure.” This includes programs for maternity and paternity leave, child care, and adding additional features to Medicare such as eye care and dental coverage, among other large benefit enhancements.
I am not here to debate these programs.
The main problem the democrats have is financing the enormous cost, which is roughly equivalent to the US annual budget. They are claiming it will be spread over 10 years, but allows them to spend the money now. In essence that means at least a 10% increase in taxes, plus interest.
I do not see that as transitory in regards to inflation either. Another topic altogether.
Part of this financing is raising the top tax rate from 37% to 39.9% on ordinary income, and another major part is raising long-term capital gains tax rates from the current 20% (or less).
Unknown at this time is what rate they will raise it to be. The Democratic Party platform supports elimination of the long-term cap gains tax rate entirely, which, combined with raising the highest tax bracket would mean essentially doubling the rate from 20% to 40%.
Some so-called tax experts expect the elimination of the long-term cap gains tax rates to be a 2-step process. Some of these experts are suggesting the new long-term cap gains tax rates will only go to 30% from 20%, then another step up later to elimination entirely. Democrats will claim it is raising the rate by 10%, which is true. In fact that would be a 50% increase in the tax rate. Semantics.
If you had a $100,000 gain in your stock portfolio long-term, your taxes would go from $20,000 to $30,000 or perhaps to $40,000 if they eliminate the long-term cap gains rate entirely.
The most important provision of the legislation will be the effective date that this change will be effective. From my sources, it appears it will likely be the date and time the legislation is introduced. That means if you have not sold your long-term holding prior to the INTRODUCTION of that legislation, you will be subject to the higher tax rates, whatever that rate will be.
To offset this tax increase means you will have to have additional gains of 10%-20% to offset the additional taxes to end up with the same amount AFTER TAXes. Rather a tough order after one of the best years in 20 years for the S&P 500.
You will not have perfect information prior to needing to act. You have to guess what the democrats are going to do. Once the legislation is introduced, and prior to it becoming the law, your option to get the lower current 20% cap gains tax rate is already gone.
Are you hearing about this on the main stream media? I’m not, but I also don’t listen to them very much anymore.
Consult your tax advisor, tax attorney or broker/dealer if you wish to get more information and advice. Just realize, they are also in the dark somewhat.
There are basically 4 alternatives in changing the starting point for the change to the capital gains tax.
1) Capital Gains rate change on Jan. 1 2022.
If the democrats choose to make the effective date next January 1, you can reasonably expect a major stock market sell-off between now and then. It won’t take weeks or months to develop either. First one to the door will get the best price and lock in the largest gains. It’s as simple as that. This alternative also shortens the time period prior to the midterms, giving the markets less time to recover. This makes this alternative rather unlikely.
2) Capital Gains rate change on signing of the Law by Biden.
If the democrats choose to make the cap gains rate effective on the SIGNING of the law by the President, then there will be a window for everyone to act.
It will be a brief window, thus resulting in a very sharp sell-off in the markets. I’d guess -30% or more in less than a week. But then a significant recovery immediately after. This would give the dem’s a year until the midterm elections for the markets to recover.
The reason and advantage for choosing this option by the democrats is that it would raise an immense amount of revenue immediately, probably in excess of $1 trillion this next quarter, thus greatly mitigating the cost of the “infrastructure” bill and greatly reducing the borrowing necessary to implement their plan. That alone makes this option extremely attractive to Congress.
The risk to the democrats is that there will be enormous losses in the stock market, thus greatly reducing the IRA’s and retirement funds Americans have amassed. If the markets do not rebound quickly, then there will likely be a price to be paid by the democrats in the midterm elections next year.
On the other hand, if a massive sell-off results in $3.5 trillion in tax revenues, the Dem’s can claim a huge success in paying for the benefits in the package.
The scale of long-term capital gains that exist is large enough that the dem’s could actually raise nearly that total amount of revenue by doing it this way. But it does have political risk as well if the markets don’t recover in a year.
3) Capital Gains rate change effective on the INTRODUCTION of the legislation for the infrastructure bill in Congress.
This would preclude nearly everyone from being able to cash out at lower long-term cap gain rates. It would also result in delays in the revenues, as many people would then choose to go very long term on their holdings since they would be subject to higher tax rates if they sell.
This option would produce the smallest amount of revenues immediately, and in the short term and the mid-term, thus requiring the democrats to borrow more money to fund the infrastructure bill and making it even more expensive during the year of midterm elections.
Just keep in mind that introduction of the change to the capital gains tax rates can occur any hour of any day, 24/7. You will not get a notice in advance. Under this option, there will be zero transparency prior to the introduction.
4) Lastly, it is possible that the democrats will not be able to pass the $3.5 Trillion infrastructure bill, and there is no change to long-term capital gains. I suspect this is the least likely option here.
I certainly don’t understand what goes through Chuck Schumer’s and Nancy Pelosi’s brains. They are very good at assessing politically what people will think, and what parts of the plan they will be selling. This means we’ll be seeing lots of empathetic sob stories about single (minority) mom’s struggling to keep their heads above water, and very little about what it will cost and how that will be done. Sizzle vs the meat.
Given that the objective of the democrats is to pass the infrastructure bill and to raise a very substantial amount of the cost in the short term, I would not be surprised if they make it a 2-step process. First, introduce the legislation with an effective date of the INTRODUCTION, then 2nd, at the last minute they concede to Republicans to replace that language with a “window” that keeps the current cap gains for a 1-2 week period before elimination of the long-term gains are implemented.
This would effectively give them 1) an appearance of transparency, 2) an empathetic appearance to give us an opportunity to get the current 20% cap gains rate, 3) a large market decline with a deadline, 3) more time to recover from the market downturn prior to the midterms, and 4) a very large and immediate cash inflow to help pay for the infrastructure bill. It would also give them the opportunity to blame republicans for the market decline.
But, this is congress at work. It does not have to make sense to ordinary citizens like myself. I certainly am not an expert at political posturing.
I have already taken my actions, right or wrong, to lock in the lower current rate.
The rhetoric is getting hot and heavy already, but nothing like we will see in the next few weeks. There are no hearings scheduled at the House Ways and Means committee. I don’t know the schedule that will be followed.
Don’t expect me to make any stock recommendations until after this issue is settled. Too much risk for me to be a buyer right now.
Let’s Go Get the Money.
Or at least keep what we have now.
JimB.