The Impact of the Biden Capital Gains Tax Plan on Future Startups

• Author: Jeffrey Simmons
• Posted: 2024-06-08

Over the course of his presidential campaign, President Biden would constantly talk about his promise to make the wealthiest of Americans finally pay their fair share in taxes. These taxes will be used to pay for a number of large projects also promised by President Biden during the 2020 elections. Some of these include his infrastructure plan as well as an energy plan to help move the country move away from fossil fuels. Although the plan to increase taxes on the wealthiest of Americans has been a popular topic amongst both Democrats and Republicans, there have been some concerns surrounding the plan to increase the tax rate on capital gains. To clarify, capital gains taxes are not the same as income taxes. Capital gains are simply an increase that may be seen with assets such as real estate, mutual funds, and stocks. If the tax proposal that President Biden wants is passed by Congress, it can mean that those assets will begin to be taxed at a much higher rate. It is this area that has made current and future startups a little worried about their future.

Future Impact on Startup Employees

As stated above, if the current proposal is passed, it can quickly begin to affect the wealthiest of Americans. However, one group of people that many are glancing over are also going to be greatly affected by this change. Those people include startup employees who are not yet wealthy. The reason why this group of people are not being paid attention to in Washington is that they are not yet within the specific tax bracket being targeted. It is that reason why startup employees must begin to pay close attention to this issue and begin to formulate a plan on what they should be doing with their stock options. Many financial experts are hoping to calm down startup employees as well as their owners by stating that the proposed tax increased on capital gains is not yet set in stone. This means that if the plan does begin to move forward, it may look nothing like the current information out at the moment. However, even the experts have come out to comment that even though there is no cause for alarm, employees should at least take the time to create a plan if it gets to that point.

Preferential tax rates Ending?

Although short-term capital gains have always had a historically high tax rate, most people would often overlook that fact because startup employees and private investors would usually hold onto assets for more than a year, aka long-term capital gains. However, under President Biden's tax proposal, the tax rate on long-term capital gains would drastically increase on income over $1 million. In many cases, employees who are not wealthy themselves will often heed the advice of others and wait until a year has passed by in order to sell and thus benefit from preferential tax rates. This, however, would not be there anymore if the tax proposal is passed. Suddenly, other factors will come into play, such as the income levels of the individual and at what point they sold. What this means is that individuals would have to really stop and take the time to read through the details of the new (if it passes) legislation. You may have to ask yourself questions such as:

• Will any changes occur to qualified small business stock?


• Am I able to plan around the sale in order to stay below the $1 million threshold?


• Should I add additional income to reach the preferential rates, or are $1 million in capital gains enough?

Plan of Attack on Your Stock Options

Although at the moment there doesn't seem to be any movement towards making it a reality, startup employees should still take the time to create a plan of attack of the tax proposal does move towards congress. But that does not mean that you should avoid exercising your options, even if the tax proposal does become a reality. The reason for that is because many companies place a deadline on employees to exercise their options after they have left the company. This means that there are many other factors other than taxes that should go into consideration regarding when you exercise your options.