Capital gains taxes are the price of making a good investment. They’re levied on profitable stock trades and real estate deals but also can apply to sales of businesses, pieces of art, collectible cars, gold and other assets. For the second time in a year, President Donald Trump says he’s “very seriously” considering reducing capital gains tax bills for investors, while his presumptive Democratic challenger, Joseph Biden, would raise money for his domestic agenda in part by doubling that tax rate.

1. How are capital gains taxed?

Investors are taxed on the difference between what they paid for the asset and what they sold it for. The federal rate in the U.S. 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. More than 59% of taxpayers earning at least $250,000 reported capital gains income in 2017 versus about 15% of those earning $50,000 to $100,000, according to Internal Revenue Service tax-return data. And some low-income taxpayers don’t pay the tax at all: Individuals earning up to $40,000 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 in the world. Some countries, such as Switzerland, have no specific federal capital gains tax but tax the sales at ordinary income rates. Others such as Belgium and Denmark exempt some stock sales held for at least a year from capital gains taxes.

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. Who wants to raise the rate?

Raising the capital gains tax is one of the most targeted ways to raise taxes on the wealthy, which was a common theme among the large group of Democrats hoping to win the presidential nomination in 2020. Biden, the former vice president who is days away from becoming the official Democratic nominee, would effectively double the rate by subjecting capital gains to his plan’s top marginal rate, 39.6%, for people with incomes of $1 million or more. The general idea is being cheered on by Bill Gates, the billionaire co-founder of Microsoft Corp., who said in a February television interview that “the big fortunes, if your goal is to go after those, you have to take the capital gains tax” and “increase that.”

6. What might the Trump administration do?

“We’re looking at also considering a capital gains tax cut, which would create a lot more jobs,” Trump said at a White House news conference on Aug. 10. He could possibly do that on his own by directing the Treasury Department to publish guidelines that would slash tax bills for investors when selling assets. (Their original purchase price would be adjusted upward with inflation, minimizing the “gain” on which they are taxed.) That would amount to a tax cut worth more than $100 billion over a decade. The change has been a longtime goal of Trump’s top economic adviser, Larry Kudlow, who has said the policy would spur job creation and economic growth because people wouldn’t be taxed on what he’s called “phantom income.” To pursue that proposal, the White House would have had to sidestep Congress, which has the sole authority to cut tax rates.

7. Can the White House do that?

It depends whom you ask. President George H.W. Bush’s administration looked at indexing capital gains but ultimately dropped the idea over concerns about legal challenges. Democrats say the White House has “questionable authority” to “lavish tax cuts upon our country’s wealthiest.”

8. Who would benefit?

About 95% of the benefit from indexing capital gains to inflation would accrue to the top 5% of taxpayers, according to the Penn Wharton Budget Model. 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.

(Corrects which taxpayers pay 0% capital gains rate in second answer.)

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