Capital Gains: ELI5

An Idiot's Opinion

What are capital gains?

When you sell a stock for a profit, that profit is considered a capital gain.

If the time between when you bought the stock and sold it is less than one year = short-term capital gain = taxed as ordinary income (whatever tax bracket you fall into).

If the time is more than one year = long-term capital gain = taxed at a lower rate (historically).

On Thursday, President Biden announced plans to propose an increase in the long-term capital gains tax rate for those earning $1 million or more to 39.6%

The current maximum rate for long-term capital gains is 20%

This is my attempt to ELI51.

Why does the White House want to raise the tax rate?

They need to fund their $4T (with a T) plan to reshape America somewhere. This would raise significant revenues, while “only affecting 0.32% of American taxpayers.”

An Idiot’s Opinion

This is well-intentioned, but I think it would be like cutting off a limb just as the country is seeing light at the end of this…shit tunnel.

The “only 0.32% of Americans would be affected” talk is misleading. This tax also applies to companies.

There are 3 key consequences I see if it were to pass:

  • Risk tolerance will change 👉 entrepreneurship = stifled

    • Higher capital gains = less capital for investments

    • Less capital for investments = less risk = less innovation

    • Uber, Airbnb, Pinterest, Amazon, Stripe, Doordash, Lyft, Instacart, Grab, Lemonade, Robinhood, PayPal, Square, WeWork, SoFi, etc.

    • The companies that will be providing the jobs for the next 100 years aren’t funded by government dollars.

    • They’re funded by RISK capital.

    • Add to the risk by raising rates and you crush all that opportunity.

  • Inflation 👉 already a concern

    • This proposal raises taxes on businesses (who can afford it)

    • Shockingly, businesses (for-profit organizations) historically pass those costs on to consumers (who can’t afford it) = higher prices

    • Unattractive markets (because of the high rates) = more spending = higher demand

    • Higher demand in a market already experiencing shortages with a broken supply chain = persistent increases in prices

What will happen?

This is a bad idea, and I think it’s unlikely to pass.

I think President Biden threw out this obnoxiously high number because it’s good politics.

“Taxing the rich” always plays well to the left, but the reality is that such a radical tax hike would do more harm than good.

The government is essentially saying, “we’ll spend this money better than you will.”

I don’t think so.

More likely is a compromise (maybe in the mid-high 20s), or no change at all.

But then again, I write a newsletter filled with memes and gifs. What do I know?

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“Explain like I’m 5”