US Lawmakers Consider Overhauling Capital Gains Tax

Key facts

• The Big Beautiful Bill (BBB) proposes to nearly double the top federal long-term capital gains rate from 20% to 39.6%.
• For high-income individuals, the top rate could reach 43.4% including the existing Medicare surtax.
• The bill introduces a new capital gains tax bracket for income exceeding $1 million.
• Corporate capital gains taxes on asset sales and stock buybacks would also face new levies.
• The legislation targets approximately $21 trillion in currently untaxed investment gains.
• Existing tax loopholes, such as stepped-up basis at death and 1031 exchanges, may be limited or eliminated.
• The IRS has adjusted capital gains tax income thresholds for 2026 due to inflation.

Sweeping Reforms Target Investment Profits

The United States is contemplating a significant overhaul of its capital gains tax structure, embodied in a legislative proposal known as the Big Beautiful Bill (BBB). This comprehensive package aims to fundamentally alter how both individuals and corporations are taxed on their investment profits. The core of the bill's ambition is to dramatically increase the tax burden on the nation's wealthiest investors and large companies, while simultaneously seeking to close a multitude of long-standing tax loopholes that allow substantial investment gains to go untaxed. At the heart of the proposed changes is a dramatic increase in the top federal rate for long-term capital gains. Currently at 20%, this rate could nearly double to 39.6%. When combined with the existing 3.8% Medicare surtax on investment income, the effective top rate for high-income individuals could soar to 43.4%. This would represent the highest capital gains tax burden seen in the United States since the 1920s. The bill specifically aims to address the approximately $21 trillion in investment gains that currently escape taxation under existing rules. By targeting these untaxed profits, lawmakers hope to generate substantial new revenue and foster a more equitable tax system, leveling the playing field between ultra-rich investors and ordinary citizens who typically see minimal changes to their tax liabilities on smaller gains.

A New Bracket for the Affluent

A key innovation within the Big Beautiful Bill is the introduction of a dedicated capital gains tax bracket for individuals whose income surpasses the million-dollar mark. Under the proposed structure, any capital gains that push an individual's adjusted gross income above $1 million would be taxed at the new, elevated rate of 39.6%. This measure is designed to ensure that the wealthiest segment of the population contributes more significantly to tax revenues. For those earning below this threshold, the existing preferential long-term capital gains rates of 0%, 15%, and 20% would continue to apply. This means that middle-class and more casual investors, whose gains do not push their total income into the new top bracket, would largely remain unaffected by the rate hikes. The bill's architects have emphasized that these lower brackets, intended to encourage long-term investing, will remain intact for the majority of taxpayers. However, for investors whose gains push them over the $1 million income threshold, the impact could be substantial. For instance, a $2 million gain that previously might have incurred around $476,000 in taxes could now face a bill closer to $868,000, nearly doubling the financial impact. This steep increase is intended to align the tax treatment of significant investment profits with that of ordinary wage earners.

Corporate Crackdown and Loopholes

The proposed legislation extends its reach beyond individual investors to encompass corporate taxation, introducing new levies on capital gains realized by companies. Big businesses would face new taxes on the sale of assets, and the bill also plans to impose heftier penalties on stock buyback programs. This dual approach aims to curb corporate tax avoidance and encourage reinvestment or dividend distribution rather than share repurchases. Furthermore, the Big Beautiful Bill seeks to eliminate or curtail several tax loopholes that have long been utilized by wealthy individuals and corporations. Among the provisions targeted for reform are the "stepped-up basis at death" rule, which allows heirs to inherit assets at their current market value, thus erasing capital gains taxes on appreciation that occurred during the deceased's lifetime. The "1031 exchange," which permits investors to defer capital gains taxes by reinvesting proceeds from a property sale into a similar property, is also slated for limitations. These proposed changes signal a significant departure from current tax policy, aiming to close avenues for tax deferral and avoidance. The closure of these loopholes is expected to have a material impact on estate planning and investment strategies for high-net-worth individuals and large enterprises.

Expanded 0% Bracket and State-Level Impacts

While the headline proposals focus on increasing taxes for the wealthy, the One Big Beautiful Bill Act also includes provisions that could expand eligibility for the 0% capital gains tax bracket for certain taxpayers. This means that a greater number of individuals, depending on their income levels and filing status, may be able to avoid federal taxes on their long-term investment gains. The bill's impact is also expected to vary significantly on a state-by-state basis. The way state tax laws align with federal reforms under the BBB will affect an individual's total capital gains liability. High-tax states and states with no income tax will present different financial landscapes for investors navigating the new federal rules, adding a layer of complexity to tax planning. Understanding how capital gains are taxed—based on holding periods, income levels, and filing status—remains crucial. Short-term gains, defined as profits from assets held for a year or less, are taxed at ordinary income rates, which can range from 10% to 37%. Long-term gains, from assets held for over a year, are subject to the more favorable rates, with the BBB aiming to significantly alter the upper tier of this structure.

Inflation Adjustments and Future Considerations

In parallel with the legislative proposals, the Internal Revenue Service (IRS) has announced adjustments to capital gains tax income thresholds for 2026, reflecting annual inflation. These adjustments, effective for tax returns filed in early 2027, mean that the income levels at which different capital gains rates apply will shift. For instance, the threshold for the 0% rate for married couples filing jointly is set to increase from $96,700 in 2025 to $98,900 in 2026, allowing an additional $2,200 in income to be taxed at the lower rate. Similarly, the threshold for the 20% rate for married couples filing jointly is projected to rise from $600,050 in 2025 to $613,700 in 2026. These modest inflation adjustments aim to ensure that taxpayers are not pushed into higher brackets solely due to rising prices, though they occur against the backdrop of potentially dramatic rate increases proposed by the BBB. The legislation also introduces a new tax-advantaged savings vehicle called the "Trump Account," designed to help families save for children. Unlike initial proposals that suggested qualified withdrawals might be taxed at long-term capital gains rates, the final version mandates that distributions from these accounts will be taxed as ordinary income. This means earnings within the account grow tax-deferred, but withdrawals are treated like wages or other taxable income, foregoing the preferential rates typically applied to investment gains.

The bottom line

• A proposed US law, the Big Beautiful Bill (BBB), seeks to significantly increase capital gains taxes for wealthy individuals and corporations.
• The top federal long-term capital gains rate could nearly double to 39.6%, potentially reaching 43.4% with surtaxes.
• A new capital gains tax bracket will apply to income exceeding $1 million, impacting high earners disproportionately.
• The BBB aims to close tax loopholes, including stepped-up basis at death and 1031 exchanges, to capture previously untaxed investment gains.
• While increasing rates for some, the bill may also expand eligibility for the 0% capital gains tax bracket for certain taxpayers.
• Inflation adjustments by the IRS will alter capital gains income thresholds for 2026, affecting tax liabilities alongside legislative changes.