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The End of the Preferential Capital Gains Rate?

By David Donnelly, CPA-Houston

The Biden Administration has proposed the elimination of the preferential tax rate for long-term capital gains for individuals with adjusted gross incomes in excess of $1 million.  

Whether this happens or not depends on whether the Biden Administration has, and wants to use, the political capital to get it through the U.S. Senate. The Senate currently has 48 Democrat senators, plus two Independents who caucus with the Democrats, so passage is by no means assured. 

A Little History

The modern income tax came into being with the Revenue Act of 1913, which did not differentiate between capital gains and other income. The distinction came into the law from the Revenue Act of 1921.

In the last 100 years, there has been much tinkering with the taxation of capital gains: the rate of tax, the holding period, treatment of losses, etc. However, the concept has remained in the law for most of that century.

In 1976, when Jimmy Carter was elected president, his platform included the elimination of the preferential tax rate for long-term capital gains. At this time, the Democrats controlled both the House and the Senate, and there was much anxiety about the demise of long-term capital gains treatment. However, the preferential treatment remained in the law until 1986 under the Reagan Administration, with the enactment of the Tax Reform Act of 1986

But, within two years of TRA ‘86, the preferential rate for long-term gains was back in the Code and has remained there since.

All this history has little to do with the currently proposed changes, but hopefully, the senators understand the history of capital gains taxation and will consider that history before making a change.

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