TL;DR: What’s being discussed and what investors can do right now

• Several proposals currently in Washington would increase income and capital gains taxes for higher-income investors, including raising long-term capital gains taxes and taxing unrealized gains.
• Two proposals are being circulated to ensure wealthy individuals pay their fair share by implementing a minimum income tax and closing popular tax loopholes.
• Two proposals in Congress would reduce or eliminate capital gains taxes on homes, benefiting homeowners across all income brackets.
• There are plenty of steps you can take to minimize your capital gains tax burden, regardless of which (if any) of these proposals become law.
• If you’re uncertain how tax proposals will affect you, consult with your advisor or tax professional.

Why capital gains policy is back in the spotlight

Capital gains taxes are often a flashpoint in fiscal policy debates. Over the past several years, there have been plenty of key proposals introduced, largely targeting wealthier and higher-earning households.

For example, frequently discussed proposals include taxing unrealized gains for wealthy individuals, closing loopholes that wealthy individuals often use to defer taxes, and increasing tax rates on wealthy individuals. At the same time, there are proposals to lower the tax burden, such as reducing or eliminating capital gains taxes on primary residences.

The proposals we’ll discuss in this article are just that: proposals. None of them has been enacted into law at the time of writing this, meaning you don’t need to account for them when making your tax plans for the year. While the most controversial proposals often make news headlines, they rarely go on to become law.

Current-law refresher: how capital gains taxes work

The federal government (and most state governments) taxes capital gains, which are the income you earn when you sell an asset. The capital gain is your profit, meaning the difference between the amount you sell an item for and your cost basis (usually the purchase price).

Realized vs unrealized gains

An unrealized gain exists when an asset you own has increased in value, but you haven’t sold it yet. For example, if you bought a stock for $100 per share and it’s now worth $150 per share, the gain is unrealized as long as you still own the stock. Unrealized gains aren’t taxable under current law.

A gain becomes realized the moment to sell or otherwise dispose of the asset. Once you’ve realized the gain, you’ll be subject to capital gains taxes on your gain. The amount you’ll pay is based on the value of the asset at the time you sell it.

Short-term vs long-term gains

When calculating your capital gains taxes, it’s important to determine if you have short-term or long-term gains, as they are taxed differently.

Short-term capital gains, which are those on assets you’ve held for one year or less, are taxed as ordinary income. Rates range from 10% to 37%, and the rate you’ll pay depends on which tax bracket you fall into.

Long-term gains, which are those on assets you’ve held for more than one year, are taxed at a more favorable rate. Rather than being taxed at your ordinary income tax rate, they’re taxed at either 0%, 15%, or 20%, depending on your household’s taxable income. Most individuals fall into the 15% capital gains tax bracket.

NIIT: the extra layer some investors overlook

The net investment income tax (NIIT) is an extra tax that applies to high-income individuals, estates, and trusts. The tax is 3.8% on the lesser of the net investment income or the amount by which their modified adjusted gross income (MAGI) exceeds a certain statutory threshold.

For wealthy individuals, the NIIT will increase your taxes on your capital gains, dividends, interest, and other investment income, so it’s important to account for it in your tax plan.

The major capital gains proposals investors are hearing about

There have been several different capital gains tax proposals to pay attention to. You can learn more about them in the table and sections below.

Proposals tied to the administration budget framework

The Department of the Treasury’s 2025 revenue proposals included several changes to capital gains taxes, primarily for wealthy individuals.

For example, the department proposed increasing capital gains, income, and NIIT taxes for high-income households. Additionally, there was a proposal to impose capital gains taxes on gifts and transfers at death. Currently, assets are transferred with a stepped-up basis when the owner passes away.

It’s important to note that these proposals were introduced in March 2024 during President Biden’s presidency, meaning the department is under different leadership today. As a result, we’re unlikely to see any of these proposals under the current administration.

Home-sale capital gains proposals (Section 121)

Two proposals currently in Congress would lower capital gains taxes when you sell your home. One proposal would increase the home sale tax exclusion, while the other would eliminate the dollar limitations entirely. 

Under current law, you can exclude the first $250,000 of your home sale (or $500,000 if you’re married filing jointly) from capital gains taxes if you’ve lived in and owned the home for at least two of the past five years.

Billionaires Income Tax

Under current law, high earners are able to use loopholes through deferral strategies known as “buy, borrow, die” to indefinitely defer income taxes. A group of Senators has introduced a bill to close these loopholes and require high earners and wealthy individuals to pay taxes.

Planning moves that can help regardless of which proposals advance

As an individual taxpayer, you have little say over which, if any, of these proposals advance and become law. The good news is that no matter what happens, there are steps you can take to lower your capital gains taxes.

Manage timing and tax brackets with multi-year planning

If you have flexibility about when you sell an appreciated asset, you can map out your income across multiple years to help you sell in years when your tax rate is lower. You can also avoid stacking large gains on top of your ordinary income to help avoid pushing you into NIIT territory.

Finally, you’ll get the lowest tax rate on your capital gains when you hold assets for one year or more.

Use tax-loss harvesting to offset gains (and avoid wash sales)

Tax-loss harvesting is a strategy of selling investments at a loss to help offset the capital gains realized from selling other assets. In effect, you reduce the net amount of gains subject to taxes. You can also claim losses of up to $3,000 in excess of your gains.

Just watch out for the wash sale rule, which prevents you from purchasing substantially identical securities within 30 days before or after selling a security to claim a loss.

Consider direct indexing (when appropriate) for more flexible tax management

Direct indexing allows you own individual securities that make up an index rather than simply investing in the index fund itself. It gives you the ability to selectively harvest losses at the individual security level and give you more control over when you sell assets for a gain.

Reduce capital gains through charitable strategies

Charitable giving is one of the most powerful tools for managing your capital gains tax burden. There are several ways you can lower your taxes with charitable strategies.

Donating appreciated securities

If you donate an appreciated security, you can claim a deduction for its full market value avoiding a capital gain. This could be especially beneficial for assets with a very low cost basis that have increased significantly in value.

Donor-advised funds for bunching and multi-year giving plans

A donor-advised fund (DAF) allows you to make one large charitable contribution in a single year, take the full deduction up front, leave the money in the fund to grow, and then recommend grants to specific charities over multiple years. Bunching your charitable contributions like this can help you have enough deductions to itemize rather than having years of smaller donations that you can’t deduct.

Watch for “ripple effects” of large gains beyond capital gains tax

A large capital gain doesn’t just affect your capital gains tax bill. It can also increase your MAGI, trigger NIIT taxes, raise your Medicare premium surcharges, phase out deductions, and affect financial aid calculations. An advisor can take a more detailed look at your financial situation to warn you against these possible consequences.

What to monitor next

You don’t necessarily have to track every bill introduced in Congress, but there are still ways to stay informed about what’s going on. Some reliable sources for capital gains tax developments are:

• Treasury Greenbook
• IRS Net Investment Income Tax page
• Congressional committee reports
• Joint Committee on Taxation revenue estimates
• Nonpartisan fiscal analysis from organizations like the Tax Policy Center, the Tax Foundation, and the Committee for a Responsible Federal Budget

A simple “investor checklist” for the next advisor meeting

If you’re concerned about your capital gains tax burden, here’s a checklist of items to discuss at your next meeting with your financial advisor:

Your projected taxable income for the year and whether there are any major changes expected in the next two to three years

Whether you have any planned liquidity events, such as selling a business, real estate, or concentrated stock position

Whether you have any charitable giving goals that could be aligned with your tax minimization strategies

Your estate plan and how it could be affected if there are any changes to the way assets are passed down with their current step-up in basis

New Capital Gains Tax Proposal FAQs

What’s the difference between realized and unrealized gains?

Unrealized gains essentially only exist on paper. Because you haven’t realized the gain, you won’t pay taxes on it. A gain is realized once you sell the asset. It’s at that time that you’ll owe capital gains taxes.

How does tax-loss harvesting work?

Tax-loss harvesting allows you to lower your capital gains taxes by offsetting them with capital losses. To use this strategy, if you’ve sold an asset for a gain, you can find another asset in your portfolio to sell at a loss. When you file your taxes, each dollar of capital loss will be used to reduce your capital gains subject to taxes.

Can I donate appreciated stock to reduce capital gains taxes?

Yes, you can donate appreciated stock, and it’s an excellent way to reduce your tax burden. It’s more tax-efficient than selling the asset and donating the cash, and generally works best for long-term appreciated securities held outside of tax-advantaged retirement accounts. Make sure you consult a tax advisor ahead of time to confirm you’re eligible and would be able to deduct the value.

What should I do if I expect a large liquidity event this year?

If you expect a large liquidity event, such as the sale of a business or another valuable asset, sit down with your advisor before the transaction closes. They can help you evaluate your expected gain, the likely tax rate, how that tax burden fits into the rest of your tax liability, and any strategies you can use to minimize the tax outcome.

How should investors think about “policy risk” without making emotional decisions?

Policy risk is real, but it’s not something you can plan ahead for in all cases. If a specific policy appears likely to be enacted into law, it may be worth discussing with your advisor if it will affect you. However, it’s important to not make emotional decisions or changes to your finances in response to every policy proposed. Most proposed tax changes never come to fruition.

Closing: focus on controllables

The capital gains tax landscape may continue to evolve, but the best strategies to reduce your tax burden are likely to stay largely the same. Because you have control over the planning process, you can work with your advisor to review your tax exposure while keeping an eye on relevant proposals.

If you’re ready to review your capital gains strategy, set up a free consultation with an advisor at Wealth Enhancement Group. We can discuss your situation and explore planning opportunities tailored to your goals.

This information is not intended to provide individualized tax or legal advice. Discuss your specific situation with a qualified tax or legal professional.

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