Biden Would Double This Tax That Trump Wants to Cut

In November, Americans will decide who becomes the president of the United States for the next four years.

There's a lot to consider when making your choice, as the candidates diverge on some key issues. One of them relates to a specific tax. Republican President Donald Trump wants to cut that tax, and Democratic former Vice President Joe Biden wants to increase it for some Americans.

Image source: Getty Images.

Biden and Trump are far apart on this tax

The tax that's a key point of disagreement for Trump and Biden is the capital gains tax, which is assessed on profits from investments. If you buy one share of a stock for $10 and sell it for $100, you'd pay capital gains taxes on $90. 

Under the current rules, if you own an investment subject to capital gains for one year or less and sell it for a profit, you'll be taxed on your gains at your ordinary income tax rate. But if you own it for longer than a year before selling, you pay lower rates that depend on your income and tax filing status. The table below shows the rates for 2020. 

Data source: IRS.

There are some nuances, including special rules for real estate and collectibles and a 3.8% net investment surtax for high earners. This is, however, the basic gist of the rules that currently apply. 

Here's what Biden and Trump would do to the capital gains tax

So now that you know the current rules for the capital gains tax, here's what you need to know about how Biden and Trump would change them. 

Trump has repeatedly indicated he wants to reduce capital gains taxes. In fact, he's put forth several different proposals for doing so.

One would involve reducing the top capital gains tax rate from 20% down to 15%. That's the simplest approach and the impact is obvious. Wealthy Americans who have substantial income would pay a smaller percentage of their gains to the IRS.

However, another alternative involves indexing the long-term capital gains rate to inflation. This is a bit more complicated, but it would reduce the amount of capital gains you're taxed on by changing the cost basis and would affect every investor, not just the wealthy. 

If the capital gains tax were indexed to inflation and you purchased a $100 stock that you sold for $200 10 years later, you'd be taxed only on $80 in gains if inflation totaled 20% during the decade you held the stock. Some speculate President Trump could take this action by executive order, bypassing an uncooperative Congress if the legislature doesn't act to cut capital gains.

Biden, on the other hand, wouldn't cut the capital gains tax rate but instead would increase it. Specifically, his plan indicates he would raise the 20% capital gains rate to 39.6% -- which is nearly double. Biden has said he'd also close loopholes allowing the wealthy to avoid paying capital gains, such as the basis step-up provision for assets held at death and given to heirs.

Will the next president change the capital gains tax rate?

If you're an investor, capital gains taxes impact the amount of income you get to keep from profitable investments, so it's well worth paying attention to proposals to change your tax rate. However, to alter the capital gains tax rate, the president would need Congress to act. Whether this will be possible depends not only on who is in the White House, but also which party has a majority in the House and Senate.

It remains to be seen if that happens, but it's worth paying careful attention to the outcome of the election. If the Democrats take control of all three branches of government, some Americans may need to plan for higher taxes on investment gains.