J.P. Morgan’s Market Movers

Capital gains tax hike is proposed. What do you do now? Many are asking if they should realize gains early, or defer and possibly pay more next year.

President Joseph R. Biden has unveiled his American Families Plan, which proposes raising the top U.S. tax rate on long-term capital gains (LTCG) from 20% to 39.6% for households making $1 million or more. Now, many of our clients are asking: should they realize income soon, while long-term capital gains tax rates are still low, and perhaps before the market prices in the impact of expected tax hikes?

Many will want to decide soon whether it would be better for them to throw out the playbook and pay taxes early on their gains, or defer payment until later, when tax rates may well be higher. This decision may have the greatest consequences for owners of concentrated, low-basis positions in publicly traded stocks, as their LTCG tax bills could be the highest. Uncertainty remains over what, if anything, Congress will do about the LTCG rate. Biden’s proposal is just that: a proposal. However, it is entirely possible there will be no increase. And if that’s the case, a premature recognition of gains would be uneconomical.

Market reaction is unclear. News of a possible increase in the LTCG rate had not, at the time of writing, affected stock prices. Does that mean market participants are unsure Congress will actually pass a rate increase? Or do investors believe that higher rates would not meaningfully impact overall stock market profitability? It’s unclear. Maybe the latter. After all, according to the Tax Policy Center, only about 25% of U.S. equities are owned in taxable accounts, the only place in which a change in the LTCG rates would have an effect. (The remaining 75% is spread across foreign holdings, retirement accounts and institutional nonprofits.) Changes in corporate tax policy are likely a bigger headwind to the market than a higher long-term capital gains tax rate.

We strongly advise against making any investment choices based solely on your view of short-term political outcomes, which is what a decision to sell based exclusively on a prediction of what LTCG rates next year would be. You are far more likely to achieve your long-term goals if you take a larger view of the fundamentals of the economy as a whole, markets generally, specific sectors and business trends, specific company management and outlook, and the principles of diversification.

Study your individual situation before acting. An analysis of your holdings and goals would help you evaluate your best moves now.

We want to hear directly from you. Let us know if there are any relevant topics or issues of interest in the San Diego market you'd like to learn more about from our team. Contact us at: ask.sd@jpmorgan.com.