A capital gains tax hike could sink stocks. This is how financial advisers and their clients can stay one step ahead.

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Many financial advisers follow Warren Buffett’s lead, adopting a buy-and-hold mindset and urging nervous clients to ignore scary headlines in order to achieve long-term profits. But what if those headlines signal a threat to a long-term investment plan? Case in point: On April 22, US stock markets reacted badly to reports that President Joe Biden could propose a capital gains tax increase to 39.6% for Americans who earn. more than $ 1 million. That would almost double the current base rate of 20%.

Once Biden announces the proposal, Senate lawmakers will haggle it. The result remains unclear, but it is quite possible that at some point there will be a capital gains tax increase for ultra-wealthy investors. However, the news raises questions for all investors. Should they rush to sell to their big winners to avoid a higher tax if they wait? How can you capitalize on the uncertainty? Regardless of how this plays out, what short-term impact will trading have on the markets? Chris Diodato, a certified financial planner in Palm Beach Gardens, Florida, says a short-term market correction can occur “probably towards the end of this year” if the capital gains rate increases and is not retroactive to 2021. Yes If the rate increase becomes law and takes effect retroactively, you suspect that a correction could occur sooner. “But if investors sell more, where are they going to put that money?” he said. “It may be put back in stock soon after” the dust settles and investors adjust to the new tax rates. Coupled with an increase in the capital gains rate, Diodato’s long-term concern is that the stock market will face an increase in corporation tax from 21% to 28%, as currently proposed. “The tax rate combined, with corporation tax and capital gains tax, can put a bit of a drag on stock prices in the long run overall,” he said. Because Biden was running for president in part by trying to raise taxes on the wealthy, Diodato didn’t find the report surprising. Over the past year, it has begun to diversify the portfolios of some clients, away from the large concentrations of high-flying companies in the technology sector, in favor of stocks and international sectors such as energy, materials and heavy industry. Uncertainty fuels anxiety when it comes to predicting how a proposed tax change might affect a portfolio. When consulting with clients, an advisor’s job is to balance the benefits of taking proactive action in anticipation of potential tax increases with the costs of overreacting to speculative proposals that may or may not happen. “The first question for investors and advisers is what is the likelihood of this becoming law,” said Roy Janse, a certified financial planner in Greenville, SC. change again if we have a different administration ”. To stay one step ahead of the tax fallout from rising capital gains rates, Janse is targeting clients with unqualified accounts who need to extract a certain amount of income. Facing a potentially higher capital gains tax if they sell their best performing stocks, they can explore smart tax strategies to access their cash. “There are more creative ways to earn an income instead of panicking, selling appreciated stocks and getting a very high rate of capital gains,” said Janse. He cites the sale of income-focused investments, such as municipal bonds, which may have less appreciation in price. Another example: securities-based lines of credit where investors can borrow cash against their account without liquidating their shares. Regardless of what ultimately happens when lawmakers finish debating capital gains rate changes, wealthy investors with a keen interest in the latest tax savings strategies may want their advisor to offer direct indexation. This involves building portfolios to replicate a market index, and you can leverage artificial intelligence to reap gains and losses from stock transactions to minimize your overall tax bill. “As more investors ask their advisor for ways to mitigate their taxes, we may see a shift toward direct indexation,” said Justin Green, a certified financial planner in Marlborough, Massachusetts. More: Capital Gains Tax Increase? Why the stock market rallied so quickly Plus: Prepare for a $ 178 Billion Sale Before Capital Gains Tax Increase. These are the stocks with the highest risk.