Explainer: Capital gains tax hike targets wealthy investors

NEW YORK (AP) — After massive U.S. government spending helped send the stock market back to record heights, with even more potentially on the way, the bill may be coming due for the nation's wealthiest investors.

President Joe Biden on Wednesday proposed to nearly double the tax rate that the highest-earning Americans pay on profits made from stocks and other investments. It would force millionaires to pay similar tax rates on their investment gains as upper-middle class households pay on their salaries, after years of enjoying lower rates.

The increase in the capital gains rate is part of Biden’s plan to tax wealthy individuals and corporations to pay for programs to help lower-income families and children.

Even though the proposal has been telegraphed for a long time, reports of its pending unveiling shook up the stock market, with the S&P 500 falling to a nearly 1% loss on Thursday. Stocks have since set more records, but the kneejerk reaction shows how much investors care about potential changes in tax rates.

WHAT IS THE CAPITAL GAINS TAX?

The capital gains tax must be paid on profits made from an investment, such as a stock or a Bitcoin. But it only takes effect after a sale locks in the gain. So if you bought a share of Tesla at $200 early last year and are sitting on a profit of more than $500, you won’t owe anything unless you sell.

If you do sell, and you are one of the highest-earning Americans, current law says you’d pay a 23.8% tax on a $500 profit, or $119. That includes the 20% tax on investments held for more than a year, known as a “long-term capital gains" tax. It also includes an extra 3.8% tax on investments for high earners that’s been around since 2013 to help pay for the Affordable Care Act.

WHAT IS BIDEN LOOKING TO CHANGE?

The tax rate on...