Capital tax raise and the impact on investments
Capital tax raise and the impact on investments.
Joe Biden plans to fund some of his plans by raising taxes on wealthy individuals and corporations
Here’s what we know so far about the capital tax raise from a proposal from President Joe Biden.
1. The capital gains tax rate for wealthy individuals to 39.6% — meaning federal tax rates for some investors could be as high as 43.4%, almost doubling.
2. Who is impacted? — It will apply to households making more than $1 million annually.
3. When will this come into effect? It is not specified now. Details are expected next week.
4. Is it final? — No, it is likely this is a high target, and the final tax will be around 30%, rather than 39.6%
Impact on stock market
Markets did a sell off once the ‘leaked report’ was out on 23 April but recovered swiftly on 24 April. The dip was due to the notion the tax raise will effectively push people away from investments. Less money going into stocks, and prices will fall.
The swift recovery was probably due to the fact people realized it was an overreaction. The final tax will not be as high as proposed 39.6%.
Impact on Cryptocurrency
Yes, cryptocurrency is taxed as well. Which explains the downside pressure on Bitcoin under $50k in recent.
Timeline
It is not specified at this moment, we can speculate on some of the impact if it happens in either 2022 or 201.
2022: If the timeline for tax raise is to take effect in 2022, there could more pain in the stock market and cryptocurrencies ahead especially just before 2022. Investors that are impacted by the new tax would want to lock in the capital gains at a lower tax rate and sell in 2021.
2021. However, if the tax raise is taking effect this year 2021 as a retrospective tax plan, the selloff in stocks and cryptocurrencies may only be short term and probably just an overreaction. Since the higher tax is already applied, might as well leave the money in the investments anyway. Is there anywhere else to invest? Probably the real estate, where in some cases you can sell off a property to buy another property immediately to prevent paying taxes but there are conditions to meet. Simply put, idle cash will still be injected and money should still stay in stocks and cryptocurrencies.
