Two Possible Drivers for Higher Capital Gains Taxes
Despite volatility, markets have continued a path of positive returns that began after the 2008 financial crisis, leading many mutual fund portfolios’ holdings to have high levels of unrealized capital gains. New entrants may be liable for capital gains distributions resulting from portfolio activity, even if they haven’t realized the returns in their portfolios. That means investors can have negative year-over-year returns in a mutual fund investment and still incur a capital gains tax.
Capital gains taxes are a frequent policy topic, regardless of the administration in office. Currently, the Biden administration is exploring capital gains tax rate changes. Meanwhile, although the Tax Cuts and Jobs Act of 2017 lowered capital gains income thresholds across the board, it also linked each bracket to inflation, which in the current environment may trigger threshold increases.