Capital gains taxes are the price of making a good investment. They’re levied on profitable stock trades and real estate deals and also can apply to sales of businesses, pieces of art, collectible cars, gold and other assets. As President Joe Biden eyes ways to fund increased social spending under his forthcoming American Families Plan, nearly doubling the capital gains rate for wealthy taxpayers has emerged as a top idea.

1. How are capital gains taxed?

Investors are taxed on the difference between what they paid for an asset and what they sold it for. The U.S. federal rate for investments held at least one year currently tops out at 20%, well below the top marginal rate of 37% on wages and salaries. (Investments held for a year or shorter are taxed the same as wages and salaries.) As with all investments, an additional 3.8% tax applies to capital gains earned by individuals earning at least $200,000, or married couples earning $250,000, to fund the U.S. health-insurance subsidy program known as Obamacare. And a higher 28% capital gains rate applies to transactions involving certain investments in small businesses and in collectibles such as art, antiques, stamps, wine and precious metals. States also tax capital gains but have varying approaches.

2. Who pays them?

Though anybody can have capital gains, it’s generally the very wealthiest of taxpayers who derive the bulk of their riches from capital gains profits on investments. Capital gains taxes don’t apply to common tax-favored retirement vehicles such as 401(k)s or individual retirement accounts; taxpayers pay ordinary rates on those savings. Some low-income taxpayers don’t pay the tax at all; individuals earning up to $40,400 pay a 0% capital gains rate this year. Homeowners also get a break. The first $250,000 in proceeds from the sale of primary residences are exempt from capital gains taxes for single person, or twice that for a married couple.

3. Are U.S. rates high or low?

The 23.8% top rate (including the Obamacare add-on) ranks among the middle of the pack of countries in the Organization for Economic Cooperation and Development. France, with rates that top out at 30%, has among the highest rates on investments. Some countries, such as Switzerland, have no specific capital gains tax but tax sales at ordinary income rates. Others such as Belgium and Denmark exempt some stock sales held for at least a year.

4. Why are capital gains taxed lower than other income?

Proponents of the lower rate say it rewards entrepreneurship and risk-taking and encourages investors to periodically sell what they own, preventing a so-called lock-in effect. (At least some of those proponents advocate no capital gains tax at all.) Critics say that the spread between how wages and investments are taxed can encourage rate arbitrage, creating opportunities for the wealthy to lessen their tax bills.

5. What does Biden propose?

He plans to propose almost doubling the rate to 39.6% for those earning $1 million or more, according to people familiar with the proposal. Coupled with the existing surtax on investment income, that means federal tax rates for investors could be as high as 43.4%. This would fulfill Biden’s campaign pledge to subject capital gains to the top marginal income-tax rate, which, under his broader tax proposal, would rise to 39.6% from 37% for households with incomes of $400,000 or more.

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