Social media is abuzz with a charge that Kamala Harris wants to tax the gains you may have on the home you’re still living in after 20 years.
Short answer: Not really. (Only if you’re worth $100 million.)
There’s another bit on the web saying Kamala Harris wants to tax your gains on the five or six stocks you own even if you haven’t sold the shares.
Short answer: Again, not really.
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So why make the charges? First, it appears to be fairly traditional election-related misinformation.
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Proposed changes to the capital gains tax code
The campaign is being waged against the Biden Administration’s tax proposal, issued in March, that envisions raising taxes among the very wealthy on incomes, capital gains, and the like.
But the target has changed now that Harris has replaced Joe Biden at the top of the ticket against Donald Trump.
It’s not meant to derail the tax plan. It has to survive a difficult road to enactment.
- Harris has to win.
- Democrats must gain control of Congress and then get a tax bill introduced and passed.
- The legislation would have to weather court fights that may reach the very conservative Supreme Court.
The campaign going on now is meant to combat Harris.
The Biden tax plan has two main goals: First, to generate more federal government revenue and bring down ballooning deficits. (The national debt is about 99% of Gross Domestic Product.) Second, rebalancing the tax code so that the wealthy contribute more to the effort.
The plan would start by boosting the top corporate tax rate from 21% to 28%, which might generate $1.3 trillion over 10 years.
It would hold top tax rates on everyone making $400,000 a year or less at current levels.
The tax plan would raise the top rate for the wealthy to 39.6% from 37% now.
To be clear, it would boost capital gains taxes on very high-income earners. Capital gains would be taxed at the top regular rate if you earned more than $1 million a year.
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And it does two more things that would profoundly change the game of capital gains as we know it.
It might get rid of the stepped-up basis
Basis is the original cost of an investment, whether stocks, bonds, or houses.
Say an investor buys shares in a company at $100. The price rises to $150 after a year, and the investor takes her profits. She pays tax only on the $50 gain.
Stepped-up basis is about what happens when the investor holds the stock until she dies. She’s paid no capital gain taxes. The tax code lets her heirs inherit the shares at $150 without taxing them. If they sell the shares at a higher price, the capital gain is based on the $150 basis.
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Let’s look at a more extreme possibility: Our investor bought 100 shares of Nvidia (NVDA) at $12 in March 1999, right after the company’s initial public offering. She held on to her investment through six splits, the last being a 10-for-1 split on June 10. But she died on Monday when the close was $126.46.
First, the original $12 price (which held for at least the first month after the IPO) has become 4 cents because of the splits. But our investor now owns 48,000 shares worth $6.07 million. Her heirs would get all of it with a new basis of $126.46. In other words, totally tax-free.
Any gain on the sale of the shares by the heirs would be on the difference between the sale price per share and $126.46.
This provision drives a lot of people buggy, and there have been multiple tries to kill the stepped-up basis provision since the 1980s with no success.
The Biden plan, which Harris has endorsed, taxes the heirs’ gains on the original basis. So, all of our $6.07 million Nvidia gains would be taxable.
The likelihood of repealing the provision if Donald Trump is reelected is less than zero,
It is still not likely to happen if Harris wins, though, because a number of Democrats aren’t on board with the idea.
Taxes on unrealized capital gains
This is the one that has generated a great deal of howling.
The Biden plan calls for a 25% tax on unrealized gains from investments. That is the gain at the end of the year, even if the shares or the house haven’t been sold.
That was enough to get conservative tweeter Mike Czernovich to write on X:
“If you own a house, subtract what you paid for it from the Zillow estimate. Be prepared to pay 25% of that in a check to the IRS. That’s your unrealized capital gains taxed owed under the Kamala Harris proposal.”
Except that’s not quite what the plan says.
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The tax on unrealized gains would apply ONLY on the returns of taxpayers with wealth of more than $100 million. (A note: the number of U.S. citizens worth $100 million or more was just under 10,000 at the end of 2023, according to Henley & Partners, an English firm that helps wealthy people move to places like the United States.)
Nearly 86 million American homes are owner-occupied. So, nearly all of these homeowners would not be affected.
But the idea is something not seen in the tax code since the 1920s.
Capital gains taxes are applied only when the gain is realized. (A polite way of saying you got the cash.)
So, let’s say our Nvidia investor decided she wanted to sell $1 million of her Nvidia bonanza and donate the proceeds to the local Boys and Girls Club. She would be liable for a capital gains tax on the stock sale.
Where she might have a problem with the Biden proposal is if:
- She’s worth more than $100 million.
- She has that big Nvidia stake.
- She has a huge unrealized gain.
It’s even more complicated. How does one calculate the wealth number? How do you calculate the unrealized gain? Does the IRS have the staff to determine if the gain is properly declared and properly calculated?
It’s not clear. And there’s no law yet. Major tax law changes can take years to enact. And any Biden/Harris tax plan will be hotly contested because 10,000 people won’t want the headache.
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