Trump Suggests Capital Gains Tax Cut: What Investors Need To Know

U.S. President Donald Trump said Monday he is considering a capital gains tax cut to stimulate the U.S. economy.

What Happened: In a Monday press briefing, Trump said a capital gains tax cut is on the table after he signed an executive order and memos over the weekend that extended unemployment benefits, deferred student loan payments and payroll taxes and provided limited eviction protections.

“We’re looking at also considering a capital gains tax cut, which will create a lot more jobs,” Trump said. 

Why It’s Important: Capital gains taxes are paid on a range of investments that are sold at a profit. Investors pay capital gains taxes on stocks, bonds, real estate (typically not a primary home), cars, boats and other tangible items.

Any profits made on the sale of these items are considered capital gains.

There are presently two sets of capital gains tax rates.

Short-term capital gains tax rates are applied to all assets that are held for less than a year before selling. In 2020, short-term capital gains are taxed as ordinary income, with tax rates ranging from 12% to 37% depending on income tax bracket.

Long-term capital gains on assets held for at least one year range from zero for single tax filers earning less than $40,000 to 20% for filers earning more than $441,450.

The Capital Gains Debate: Trump said Monday that the capital gains tax cut would “put people to work,” but critics of a capital gains tax cut say it will not benefit Americans who need support the most.

In a July op-ed, CNBC analyst Ron Insana said the majority of middle- and low-income Americans either don’t own stocks or hold them in tax-deferred 401(k) or other retirement accounts.

Ironically, he said a capital gains tax cut could trigger a major stock market sell-off.

“I would argue that, in addition to having no material benefit to the real economy, a reduction in capital gains taxes might just prompt investors to sell their big winners to take advantage of a window that may prove temporary at best,” Insana wrote.

“The wider the differential between ordinary income and capital gains, the more likely you will see wealthy investors harvest profits, if the window is temporary, while they may just move money around from one asset to another, if the cuts are permanent.”

Benzinga’s Take: A capital gains tax cut would be great news for wealthy Americans who have made a killing in the market since the March low, but it would give them a huge incentive to dump their shares once they have held them for at least one year.

Presumptive Democratic nominee Joe Biden’s tax plan proposes raising capital gains taxes to 39.6% on individuals earning more than $1 million in income annually.

From late March to late April, the SPDR S&P 500 ETF Trust SPY gained more than 30%, so mid-April of 2021 could potentially be when the window for heavy selling begins. That potential market sell-off could be much more aggressive if Biden wins the election and wealthy investors are fearful of a tax hike.

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President Donald Trump disembarks Marine One at the White House on Sunday. White House photo by Joyce Boghosian.