Antideferral Tax Legislation on the Horizon? What is Antideferral Tax Legislation?

Charles (Chuck) Rubin
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Gutter Chaves Josepher Rubin Forman Fleisher P.A.

President Biden has made no secret of his plans to raise taxes. One possible avenue is through the adoption of antideferral rules, along the lines recently outlined in a report by Senator Ron Wyden, the ranking member of the Senate Finance Committee.

Presently, taxpayers who own appreciating assets are not taxed on the appreciation until the sale of those assets. Further, the gains may be subject to preferential rates of tax.

Both of these concepts would go out the window in an antideferral regime. First, the report recommends the elimination of favorable capital gains rates. Second, as to publicly traded securities, taxpayers would be required to "mark-to-market" the value of their accounts each year for income tax purposes. To the extent those assets went up in value during the year, taxes would be due on that appreciation (or a deduction would be allowed for any loss) even though the asset was not sold. The taxpayer could no longer defer tax on gains until sale. Third, as to nonpublicly traded property, in lieu of a mark-to-market arrangement, a penalty would be imposed on the taxpayer which would grow for the longer the property is held, so as to deny the benefits of tax deferral to the taxpayer. The penalty might be an interest charge or a tax surcharge.

Special rules could apply to residences, retirement assets, and other special classes of assets. The report suggests the rules should apply only to high income or high asset households.

Such a plan would radically transform the taxation of capital in the U.S. While purportedly applicable only to wealthier taxpayers, history shows that such taxable classes tend to expand to less wealthy taxpayers over time. The plan would also result in increased tax return complexity and bookkeeping, and costs of compliance. 

Most importantly, the plan does not discuss the impacts on capital formation. It is capital investment and formation that drives economies and is the policy behind reduced capital gains rates. This new arrangement would eliminate the tax incentives to capital investment that currently exist, and may punish long-term capital investments. Treating capital badly has two principal effects. First, it takes productive capital out of circulation, where it otherwise would be producing goods, services, jobs, and innovation through research and development. Second, it would drive capital out of the U.S. to other jurisdictions that treat capital investment more favorably under the principle that capital goes to where it is treated best. None of this will improve the economy and indeed could adversely affect it in a material manner.

President Biden promised to undo the tax cuts made by President Trump. The antideferral rules, if adopted, would go far beyond undoing those cuts and instead would install a tax regime that never existed in the U.S. and a new drag on the economy that would likely have both unforseen and unfavorable consequences. Keep an eye out to see where this is going.

Below is a link to the report.

Treat Wealth Like Wages Report

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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