The Biden administration is moving to raise the long‑term capital‑gains tax rate for high‑income earners. The proposal would align the capital‑gains rate with the top ordinary‑income tax bracket, adding the existing 3.8 % net‑investment‑income surcharge. If enacted, the top rate would be 43.4 % on gains that exceed a $1 million threshold.
How the new rate is calculated
| Component | Current rate | Proposed rate |
|---|---|---|
| Top ordinary‑income tax (Obama/Clinton era) | 37 % | 39.6 % |
| Net‑investment‑income surcharge (Obamacare) | 3.8 % | 3.8 % |
| Combined top rate | — | 43.4 % |
The change applies only to long‑term capital gains—profits from assets held longer than a year, such as stocks, real estate, cryptocurrency, and the sale of privately held businesses. Short‑term gains remain taxed at ordinary income rates.
Who is affected
- Individuals with $1 million or more in net long‑term capital gains in a tax year.
- Entrepreneurs selling businesses valued at $7 million–$9 million (or higher) could see their effective tax rate jump from the current 20 %‑30 % range to over 40 %.
- Crypto investors who bought assets at low prices and now hold large unrealized gains could be pushed into the new bracket once they liquidate.
Geographic impact
- In high‑tax states such as New York and California, combined state and federal rates could exceed 50 % on qualifying gains.
- The proposal targets “passive” investment income, not wages or labor income, but the tax burden on the proceeds of successful ventures will increase substantially.
Practical considerations for high‑net‑worth individuals
- Timing of asset sales – Realizing gains before the new rate takes effect could save tens of percentage points in taxes.
- Expatriation and residency planning – Moving to jurisdictions with favorable tax regimes (e.g., Puerto Rico’s Act 60 incentives) can reduce exposure, but the “exit tax” will lock in the value of assets at the time of relocation.
- Second citizenship/passport – Securing an additional passport can provide flexibility to relocate quickly if tax policy shifts further.
- Diversification of assets – Holding assets in multiple jurisdictions or structures may mitigate the impact of a single‑country tax change.
Risks of delayed action
- Higher exit taxes – If a U.S. citizen or resident postpones moving abroad, the basis for taxation is set at the higher asset values that may have appreciated, leading to larger tax bills.
- Future tax proposals – Discussions are already underway for an unrealized capital‑gains tax and a wealth tax, which could further increase liabilities on assets that have not yet been sold.
- State‑level taxes – Even if federal rates are capped, state taxes can push the total burden above 50 % in certain jurisdictions.
Decision criteria
- Asset size vs. threshold – Determine whether projected gains will exceed the $1 million mark.
- Projected appreciation – Estimate future growth of assets; higher appreciation may justify earlier realization or relocation.
- Residency costs – Weigh the cost of moving (e.g., establishing a domicile in Puerto Rico) against the tax savings.
- Legal and compliance – Ensure any expatriation or passport acquisition complies with both U.S. and destination‑country regulations.
Summary
The pending legislation would raise the top long‑term capital‑gains tax rate to 43.4 %, affecting anyone with $1 million+ in gains. The change primarily targets high‑net‑worth individuals, entrepreneurs, and crypto investors. Early planning—considering asset sales timing, potential relocation, and securing additional citizenship—can mitigate the financial impact. Given the likelihood of further tax measures (unrealized gains tax, wealth tax), proactive diversification and residency strategies are increasingly important for preserving wealth.
