Published in Bloomberg BNA
IRS Data: Strong Markets Bolstered Capital Gains in 2014
By Colleen Murphy
May 27 — Net capital gains swelled 34.4 percent in 2014, according to preliminary data from individual tax returns.
A healthy market was likely the reason for the jump, Pinar Cebi Wilber, a senior economist for the American Council for Capital Formation, told Bloomberg BNA in a May 27 interview.
Net capital gains totaled $586.5 billion in 2014, according to the data. The Internal Revenue Service released the data May 25 in the Spring 2016 Statistics of Income Bulletin.
Capital assets include everything from homes and furnishings to investments like stocks and bonds. Capital gains or losses are the difference between the basis—usually the amount paid for the asset—and the amount realized from a sale.
Sensitive to Tax Changes
Wilber said realizations for capital gains “are extremely sensitive to the timing of tax changes,” which explains several recent fluctuations.
“If they’re expecting tax rates to decrease, people will hold onto capital gains realizations the year before. But if they’re expecting the rate to increase, they will immediately unlock and start selling,” she said.
Net capital gains increased 60.4 percent in 2012, according to preliminary IRS data from that year. High-income individuals made sales in anticipation of two rate changes, Wilber said.
The 2012 Taxpayer Relief Act raised the capital gains rate to 20 percent, from 15 percent, for individuals with gross income of more than $400,000. Individuals making between $36,250 and $400,000 continued to have capital gains taxed at a 15 percent rate.
Under the Affordable Care Act, the net investment income tax—a 3.8 percent rate on net investment income from certain investments such as capital gains and dividends—was imposed beginning in 2013 on individuals with a gross income of more than $200,000.
In 2013, after the higher rate was in effect for high-income individuals, net capital gains dropped 12.5 percent, according to preliminary IRS data from that year.
Total realized capital gains plummeted by more than 90 percent between 2007 and 2009, the worst of the Great Recession (39 DTR G-7, 2/29/16).
The Big Picture
The number of individuals claiming capital gains on their returns increased 11 percent in 2014, which Wilber said was another factor in the overall increase.
Wilber also said a 34.4 percent increase in net capital gains is about on par with increases that have played out over the past several decades.
“That’s a normal increase,” she said. “If it was 90 percent, I’d say ‘Oh that’s really good, that’s really high.’ ”
Though it is hard to say for sure, Wilber said there likely won’t be “a huge change” in capital gains for the 2015 tax year.
But because the market was weaker that year, the net gains could be lower, she said. The S&P 500 closed at 0.9 percent in 2015, ending three years of gains.