Possible capital gains tax hike ahead

Sid Queler

June 01, 2021

Congress is debating a new capital gains tax increase. 

Recently, equity markets were disrupted by the not-so-new news that the White House proposed a higher tax on realized investment profits (i.e., capital gains) to help fund the $1.8 trillion American Families Plan (AFP).

President Joe Biden’s opening bid stirred controversy and created some market volatility. Even though the plan has yet to become a bill in Congress, negotiations within Congress and between branches of the government and the two parties are likely to go on for months. Here’s what you need to know to understand the current capital gains tax proposal, who it will affect and how it may impact markets.

What is being proposed?

Among other proposals, the AFP would raise the top long-term capital gains tax rate from 20% to 39.6%. When combined with the 3.8% Affordable Care Act surtax, a small group of taxpayers (0.3%) would pay about 43.4% in taxes on recognized capital gains.[1] (As negotiations continue, it’s possible the proposed rate will be reduced.)

Who will be affected?  

If the plan becomes a bill that is signed into law, the new capital gains tax rate would apply to households with annual income above $1 million. In 2018, about 540,000 households, or less than 1% of American taxpayers, declared income at that level.[2]  If a tax increase passes—negotiations are likely to go on for months—high-income investors may take steps to limit their tax exposure by:

  • Accelerating income
  • Deferring deductions
  • Selling shares to realize gains before the change takes effect
  • Donating shares to charities using a variety of vehicles
  • Pursuing Roth conversions

The tax change also could affect business owners who are selling or considering selling their companies. There are a variety of ways to structure the sale of a business, and a higher capital gains tax rate could impact the structure chosen.

Will a higher capital gains tax affect equity markets?

To be fair, no one can be certain how a higher capital gains tax rate will affect equity markets. Historically, there have been eight changes to the rate in the last 50 years: four up, and four down. We looked at data six months after the four rate increases and found the Standard & Poor’s 500 Index was lower twice and higher twice.[3]

There is no compelling evidence that the capital gains tax rate materially impacts the stock market’s long-term return. One reason is that only 25% of the value of the equity market is held by investors subject to the capital gains tax, according to a UBS research note. Generally, pension plans, individual retirement accounts and charitable endowments are exempt from tax on capital gains.

The tax increase may create a buying opportunity

We may see some volatility if the tax increases. After a 2013 capital gains tax hike, wealthy Americans sold about 1% of their equity assets. At the time, the top 1% of Americans held about $6.7 trillion in equities, so there may have been about $67 billion in equity sales.[4]

At the end of 2020, the top 1% of households in the United States held about $17.8 trillion in equities.[5] If the tax hike passes and wealthy Americans reposition their portfolios at the exact same level as it happened in 2013, about $178 billion in equities could be sold. No one can say whether history will repeat itself. If it does—and equity markets dip—there may be a buying opportunity.

To learn more about the tax changes proposed in the AFP and the American Jobs Plan, contact Sid Queler at or 617.531.6954.

Stay tuned! The next post in our tax series will focus on the possible changes to the estate tax exemption.

Sidney F. Queler is the chief growth officer of CIBC Private Wealth, US. In this role, he leads the firm’s business development team, setting strategies and practices that broaden relationships with individuals, families, foundations and endowments. Sid also serves as a member of the CIBC Private Wealth, US Operating Committee and as a member of the advisory team for the firm's Boston office. In addition to leading national business development, he remains actively involved with client relationships.

The tax information contained herein is general and for informational purposes only. CIBC Private Wealth does not provide legal or tax advice, and the information contained herein should only be used in consultation with your legal, accounting and tax advisors.

[1] Bloomberg, 04.23.2021.
CNBC, 04.26.2021.
Strategas, 04.26.2021.
,[5] Board of Governors of the Federal Reserve System, 03.19.2021. (Equity assets as of 12.31.2012.)