President Biden’s 2022 fiscal budget includes proposals for a 39.6% (43.4% with surtax) top long-term capital gains tax rate (in the US long-term capital gains apply on investments owned for 12 months or longer). We don’t know what the final bill will look like, but there are lessons for equity investors from the 2012-13 CGT hike (top rate went up from 15% to 20%, 23.8% for high earners).

There was a clear change in investor behaviour between the announcements of tax hikes and the date they actually went live. The market chopped around before the actual implementation date as asset disposals were brought forward. The index then rallied through 2013.

Source: Bloomberg, Macrobond, Variant Perception

Looking at the sector-level, there was a clear pattern of previous winners being sold as a result of the announcement of CGT hikes.

We use August 2012 (when the American Taxpayer Relief Act passed the House) as the announcement date and we then plot the relative performance of each sector for the following 5 month period until the actual implementation date (start of Jan 2013). In the left hand chart, we see that the best performing industry heading into the CGT announcement underperformed the S&P 500 by almost 10% in the subsequent 5 month period.

Source: Bloomberg, Macrobond, Variant Perception

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