Capital gains tax reform may be coming. Here's what Republicans and Democrats want

Story by USA Today

Capital gains were largely unaffected by federal income-tax reform a couple of years ago, but recent rumblings suggest they could be put into play sooner or later.

Capital gains are the profits that people earn on stocks, bonds, housing and other types of investments. In essence, if you sell an asset for more than you paid, you have a gain, although the tax treatment is a bit more complicated than that.

Proposals from members of the two main political parties could make things more complex and politicized.

Some Republicans would like to see capital gains indexed to inflation, which would mean people pay taxes on a smaller portion of their gains. Some Democrats want to see wealthy investors pay higher tax rates on capital gains, and sooner.

Reaching a political consensus on an issue as contentious as capital gains seems unlikely. But these and other proposals could figure prominently as the presidential campaigns gear up in the months ahead.

Capital-gains taxes have a clear political undertone, as rich people own more investments that are subject to them.

"Like the estate tax, this is often viewed as a tax on the wealthy," said Mark Luscombe, a principal analyst at researcher Wolters Kluwer. "It tends to incite tax-warfare disputes between the two parties."

Capital gains apply on stocks, housing and other assets, and profits from these investments are taxed at lower rates than salary income. Capital-gain rates range from 0% for low-income individuals to 20% for higher earners with taxable income above $434,550 (singles) or $488,850 (married couples). But most people pay 15%.

Holding periods matter

The above description doesn't tell the whole story.

The current rates of 0%, 15% and 20% apply only to long-term gains, on investments owned for at least one year and a day. If you held a stock, bond or other asset for less than that, any profit would be taxed as ordinary income like wages, at higher rates.

All this can get tricky, especially if you have a lot of investments. Thankfully, brokerages and other investment companies typically will crunch the numbers for you.

If your losses exceed your gains, you have a capital loss. You can deduct up to $3,000 in losses in any year against ordinary income, with the ability to carry forward unused amounts. This is why investment advisers talk so much about tax-loss "harvesting" near year-end, especially with stocks. The idea is to sell your losers to lock in deductible losses and hang onto your winners to delay those taxes to future years.

Given that regular income is taxed at higher rates, capital gains are a bargain — and a big one. Americans reported $600 billion of gains subject to the lower long-term rates in 2016, the most recent year for which the Internal Revenue Service has released data. That's in addition to $200 billion in "qualified" dividends also taxed at capital-gain rates.

What Republicans want to do

Ideas being discussed by politicians could reshape capital-gain policies considerably. Many Republicans like the idea of linking capital-gain taxes to inflation so that investors could lower their tax.

Here's how that would work: Suppose you invested $5,000 in the stock market at the end of 2000 and that stake is now worth $8,000. Under current law, your would owe tax on the $3,000 difference, noted the Tax Foundation in a recent analysis. But because $5,000 back then really is the equivalent of about $7,200 today, owing to inflation, the adjusted gain would be closer to $800.

That would be your taxable gain under proposals such as H.R. 6444, advanced last year by Rep. Devin Nunes, R-Calif.