Potential Changes in Capital Gains Could Impact Valuations

By: Michael White

We’ve received several questions about the news yesterday, as it relates to potential changes in the capital gains rate in 2022 and how this may affect after-tax proceeds from a sale or investment in your company.

Capital gains taxes are the taxes that investors pay on the difference between what they paid for an asset and what they sell it for. Long-term capital gains taxes are applied to investments held for at least one year. The current long-term capital gains tax rates top out at 20% in the United States. While President Biden plans to release more details on the American Families Plan next Wednesday, April 28th in an address to Congress, current speculation as of April 22nd is that long-term capital gains could be raised to as much as 39.6% in the future.

While we do not expect these changes to take place during the current fiscal year, there is an increasing likelihood that this new tax regime will be in effect for 2022. When thinking through the after-tax proceeds available for distribution upon sale or investment, an increase from 20% to 39.6% implies 25% less in after-tax proceeds.

A properly run sale or investment process generally takes 6 months from start to finish. If minimizing the capital gains tax impact on your after-tax proceeds is important to you, I would be happy to share additional insight into the process and how to ensure that the potential investment closes in this calendar year.