If Biden Raises Capital Gains Tax on Millionaires, Some New Investors See ‘Buying Opportunity’

Alex Zagorski will keep an eye out for stock market offerings if President Joe Biden goes ahead with an informed plan to effectively double the capital gains tax rate for people making at least $ 1 million a year. You agree to apply a 39.6% capital gains rate for millionaires and above. Along with a pre-existing 3.8% tax tied to the Affordable Care Act, that would be the 43.4% rate. The capital gains rate on investment securities earnings is currently 20% for top earners.

If history is any guide, and if Biden can even get the idea through Congress, there will be a sell-off in the stock market somehow as some wealthy investors take advantage of lower rates before climbing. And Zagorski, a 27-year-old mechanical engineer from Detroit, Michigan with years of investment experience, will be there waiting. “My opinion on the investment is very long term,” he told MarketWatch. “I see something like this as an opportunity to buy and hold.”

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“My opinion on the investment is very long term. I see something like this as an opportunity to buy and hold ”. ”- Alex Zagorski, 27-year-old investor

Martín Sánchez, another relatively new investor, who started buying individual shares in 2018, agrees. “I think there is a buying opportunity for millennials if we see a big sell-off,” said Winston Salem, a 27-year-old North Carolina resident who works in the tech industry. If Sánchez sees the opening, he could buy some shares in companies that focus on web security, giving him the opportunity to expand his holdings, which are heavier in stocks like Disney DIS, + 0.40% and Tesla DIS, + 0.40%. Sánchez is closely following Biden’s tax proposals. There are many open questions about the possible increase in the rate of capital gains. Will Biden include the idea in the “American Family Plan” that he is expected to present on Wednesday? How many other tax increases targeting wealthy households will that plan include? Will Congress pass? But another question is: What does this potential tax increase mean for a new generation of retail investors? By now, newer investors have been through the 2020 market crash and rise, and have weathered the meme stock trading frenzy that put companies like GameStop GME, + 3.39% on a price roller coaster of Actions. Can they earn from an estimated $ 178 billion in sales that could occur before the rate increase? “There are those who can see it as, ‘Oh, this is my chance to get involved,'” said James Angel, a professor at Georgetown University McDonough School of Business.

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“” There are those who may see it as, ‘Oh, this is my chance to participate.’ James Angel, Associate Professor at Georgetown University McDonough School of Business

But like so many other things based on potential rate hikes, there are big open questions about how new investors, and investors in general, will react. “Does it create opportunities? Well, maybe, ”Angel said. “But you have to look carefully stock by stock.” In fact, a share price may have little to do with the fiscal environment, an investor note said on Friday. “Ultimately, other factors such as the outlook for economic growth, monetary policy, and interest rates are much more powerful drivers of equity market returns and valuations,” wrote Mark Haefele, chief investment officer for the management of UBS global heritage. people start selling. ‘When President Ronald Reagan signed the Tax Reform Act of 1986, he lowered the top income tax rate from 50% to 28%. The Republican president also changed the tax code to treat long-term capital gains as ordinary income, instead of giving a preferential rate on capital gains. That raised the capital gains rate to 28% for wealthy households. In the run-up to the changes during fiscal 1986, there was a 60% increase in sales of all types of capital assets, according to researchers from the Joint Taxation Tax Committee of the nonpartisan committee of the US Congress. Before a 2013 change, which brought the long-term capital gains rate from 15% to 20% and added 3.8% tax on net investment income, there was a 40% increase in “realizations “Capital gains, the researchers said, meaning investors were selling their holdings. History could repeat itself, one of the authors told MarketWatch. “Certainly, you would expect people to start selling,” said Robert McClelland, principal investigator for the Tax Policy Center. “How much, I don’t know.” But McClelland noted that it is important to remember that many buyers of the stock market are foreign investors and retirement accounts, including 401 (k) plans or pension plans, rather than individual investors operating through a brokerage account. Foreign investors own about 40% of the stock market shares and retirement accounts own about 30%, according to last year’s estimates from colleagues at the McClelland Tax Policy Center. Taxable accounts, such as a brokerage account, hold another 25% of the equity in the stock market. Another thing to remember is that if the rich are selling, it hardly means they are going to leave. “I would continue to buy for my clients,” said David Haas, owner of Cereus Financial Advisors in Franklin Lakes, NJ. “In other words, selling does not mean getting out of the market. You would sell a customer’s earnings and buy something similar to continue participating in the market. The point is to make a profit, not to stop investing. “As the markets took in the news Thursday about Biden’s potential capital gains tax hike, they ended the day on a negative note. By Friday, they rebounded. , with the Dow Jones Industrial Average DJIA, + 0.11% finishing 228 points higher, up 0.7%, and the S&P 500 SPX, + 0.29% finishing 1.1% higher. Zagorski says it could benefit from any future liquidation, but that still doesn’t erase his personal concerns about a rate hike. With any increase in the rate of capital gains, in his view, “you are simply taking money away from people who would be investing in the market.” But going forward, buying opportunities may not be clear. Some less experienced retail investors may not be able to determine whether equity sales and possible price decline are related to the situation. tax strategy, and that could make them sell too, he said. “When you see people at the top doing things, it’s instinctive to follow them, even if it’s not in your best interest,” he said.