In her first break with the platform she inherited from President Joseph Biden as part of the Democratic Party’s bid for the White House, Vice President Kamala Harris proposed a new 28 percent tax on long-term capital gains for households with annual income exceeding $1 million.
This newly-proposed rate is markedly lower than the 39.6 percent capital gains tax rate that had been first pitched as part of the Biden Administration’s 2025 fiscal year budget.
It’s much higher, however, than the current long-term capital gains tax rate, which sits at 20 percent—plus an additional 3.8 percent tax on higher earners—when investments are sold or gains are realized.
The goal of Harris’s reduced rate proposal is to provide incentive for investors to fund startups and innovation in the United States without risk of a hefty tax burden upon exit or sale.
“We will tax capital gains at a rate that rewards investment in America’s innovators, founders and small businesses,” Harris told attendees at a rally in New Hampshire this week.
“My vision of an opportunity economy is one where everyone can compete and have a real chance to succeed – where everyone, regardless of who they are, where they start, can build wealth, including intergenerational wealth,” Harris added.
While Harris’s 28 percent tax rate is a departure from the Biden agenda, the vice president is still standing by some of the proposed tax amendments outline in Biden’s original 2025 federal budgets.
This includes raising the corporate tax rate from 21 percent today to 28 percent, as well as upping the marginal income tax rate from 37 percent to 39.6 percent, and levying a 25 percent minimum income tax on households with net worth exceeding $100 million.
Chipping away at the 2017 TCJA
All of these proposals are in some capacity reversals of the controversial 2017 Tax Cuts and Jobs Act (TCJA), which was passed under the Trump Administration with the goal of decreasing the tax burden on corporations and high earners across the tax code.
You may recall that the 2017 TCJA was the same legislation that was responsible for introducing the controversial Section 174 amortization and capitalization rules around qualifying research and experimentation (R&S) work for potential tax credits.
While the impacts of these rules were manifold (and the ensuing saga around appealing the measures has been ongoing for more than six years), the crux of the controversy around Section 174 hinged on businesses no longer having the ability to deduct all R&D expenses during the year incurred.
Instead, businesses were required to amortize and capitalize their annual R&D spend: For domestic R&E expenses, the amortization period is 5 years, while foreign R&E investments must amortize over 15 years. Going a step further, expenses are “placed in service” at the midpoint of the first year of amortization, making year-one deductions only about half as valuable as they could be in following years.
While the US House of Representatives passed a nearly $80 billion tax bill to restore the immediate R&E deductions (and limit the tax burden) for businesses at the start of 2024, more wide-ranging measures and crawl backs to the TCJA are anticipated if Democratic leadership wins office in November.
Capital gains encroachment on both sides of the border
The recent developments pertaining to capital gains in the United States mirror a similar scenario playing out in Canada, where there has been significant controversy around increases to the nation’s capital gains inclusion rate from 50 percent to 66.7 percent.
Critics argue that the previous rate already put Canadian startups at a disadvantage with their global peers when it came to seeking investment, with the new rate only helping further disincentivize outside funding into nascent businesses.
“With higher capital gains tax, VC funds are now looking at smaller returns after tax, which means less funding or smaller shares left over for founders,” Laurent Carbonneau, Council of Canadian Innovators (CCI) Director of Policy and Research, explained in a statement countering the new Canadian budget measures.
While the latest developments stateside indicate that the Democratic leaders in the United States are wary about causing ire among their local innovation community, any modifications to tax rate or tax code need to be viewed through a wide lens to fully understand the implications on businesses and funding.
Factoring innovation into capital strategy
For instance, while the new capital gains rules may impact the volume and nature of outside investment into a startup, there are still tax incentives available at the federal level that will reward businesses for seeking out truly unique innovation.
Event taking into account the higher tax burden that companies may feel as a result of the Section 174 amortization and capitalization rules, policies like the IRC Section 41 Research and development (R&D) tax credit may actually become more important and valuable in offsetting dues than they had in the past.
On top of that, the R&D tax credit study you conduct as part of your claim is a great starting point to identify what costs fall under the Section 174 criteria so that you can better visualize your accurate tax status—and gain a more holistic picture of your R&D funding strategy.
At Boast, we help innovative businesses identify and quantify all available R&D activities and expenses that can qualify for tax credits to not only minimize the impact on their annual tax bills, but extend their runway in the face of a rocky financing landscape.
Using our AI-driven platform, Boast seamlessly integrates your business’ financial and payroll data alongside the activity and project tracking systems your product teams use every day. This provides a real-time, automated way for you to identify and quantify all available R&D activities and expenses—including Section 174 expenses—that can take a lot of the guesswork out of the claims process (and can be a critical asset to pass onto your CPA).
To learn more about how Boast could help you navigate the R&D tax landscape, talk to an expert today.
U.S. Capital Gains FAQ
- What new tax proposal has Vice President Kamala Harris introduced? Harris has proposed a 28% tax on long-term capital gains for households with annual income exceeding $1 million. This is lower than the 39.6% rate originally proposed in the Biden Administration’s 2025 fiscal year budget, but higher than the current 20% rate (plus 3.8% for higher earners).
- How does Harris’s proposal differ from the Biden administration’s original plan? While Harris’s capital gains tax rate is lower than initially proposed, she still supports other elements of Biden’s tax plan. This includes raising the corporate tax rate from 21% to 28%, increasing the marginal income tax rate from 37% to 39.6%, and imposing a 25% minimum income tax on households with net worth exceeding $100 million.
- How do these proposals relate to the 2017 Tax Cuts and Jobs Act (TCJA)? These proposals aim to reverse many of the tax cuts implemented by the 2017 TCJA. The TCJA also introduced controversial Section 174 rules, which changed how businesses could deduct R&D expenses, requiring amortization over several years instead of immediate deduction.
- How does this compare to recent capital gains tax changes in Canada? Canada recently increased its capital gains inclusion rate from 50% to 66.7%, causing controversy. Critics argue this puts Canadian startups at a disadvantage when seeking investment. The U.S. developments suggest Democratic leaders are trying to balance increased taxes with supporting the innovation community.
- How might these tax changes impact R&D tax credits and innovation funding? While new capital gains rules may affect outside investment in startups, federal tax incentives like the IRC Section 41 R&D tax credit remain important for offsetting tax burdens. Companies may need to rely more on these credits to maintain their innovation funding. Additionally, R&D tax credit studies can help identify costs falling under Section 174 criteria, providing a more comprehensive view of a company’s R&D funding strategy.
