No Capital Gains Allowance for American Adversaries Act

Bill Number

S. 2047

Origin Chamber

Senate

Congress

119th Congress, Session 1

Policy Area

Taxation

Status

Introduced

Latest Action

2025-06-12: Read twice and referred to the Committee on Finance.

Last Updated

2025-07-07T19:12:49Z

AI-Generated Summary

Purpose

The "No Capital Gains Allowance for American Adversaries Act" (S. 2047) aims to discourage U.S. investments in entities connected to certain foreign countries viewed as national security concerns by eliminating favorable tax treatment for gains and dividends from those investments. It treats such income as ordinary income (taxed at higher rates than capital gains) to reduce economic ties with these nations.

Key Provisions

• Treatment of Gains as Ordinary Income: Introduces a new section (1261) to the Internal Revenue Code (IRC) requiring gains from selling, exchanging, or disposing of "specified country of concern property" to be taxed as ordinary income, overriding other tax rules that might allow lower capital gains rates.
• Definition of Specified Property: Includes securities (e.g., stocks or bonds) of companies or entities that are:
• Incorporated or organized in a country of concern.
• Have most assets or employees there.
• Are owned, controlled, or directed by that country's government.
• Derive most value from such entities.
• Are controlled by entities meeting the above criteria.
• Also covers non-security property (e.g., real estate or equipment) located or used in a country of concern.
• "Countries of concern" are defined as the People's Republic of China (including Hong Kong and Macao, but excluding Taiwan), Russia, Belarus, Iran, and North Korea. "Controlled by" follows existing SEC regulations on ownership influence.
• Dividends: Amends IRC rules to exclude dividends from these foreign corporations from "qualified dividend" treatment, which currently allows lower tax rates; they will be taxed as ordinary income.
• Denial of Basis Step-Up at Death: Prevents heirs from inheriting such property with a "stepped-up" basis (reset to current market value at death, reducing taxable gains); instead, the original owner's basis carries over, potentially increasing taxes on future sales.
• Notice Requirements: The Securities and Exchange Commission (SEC) must issue rules within 180 days of enactment requiring sellers of these securities to notify buyers that gains are treated as ordinary income.
• Public List and Reporting: The SEC must publish an online list of affected securities and can require reports from companies to identify them.
• Rulemaking: The Secretary of the Treasury and SEC must issue implementation rules within 180 days, including criteria for identifying affected entities.
• Effective Date: Applies to property dispositions and dividends after January 1, 2026.

Significant Changes to Existing Law

• Shifts taxation of capital gains and qualified dividends from these sources from preferential long-term rates (up to 20%) to ordinary income rates (up to 37%), increasing tax liability.
• Removes the standard "step-up in basis" rule under IRC Section 1014 for inherited property, a common estate planning benefit.
• Introduces new SEC oversight for notifications, lists, and criteria, expanding its role in tax-related disclosures beyond traditional securities regulation.

Potential Impacts

• On Government Agencies: Increases revenue for the IRS through higher taxes on affected investments; burdens SEC and Treasury with new rulemaking, listing, and enforcement duties.
• On Citizens: U.S. investors (individuals and institutions) holding or trading these assets face higher taxes, potentially reducing after-tax returns and discouraging such investments. This could affect retirement accounts, portfolios, and estate planning for those with exposure to these markets.
• On International Relations: May heighten economic tensions with the listed countries by penalizing U.S. economic engagement, signaling a policy of economic decoupling from perceived adversaries. It could prompt retaliatory measures or affect global financial flows.

Main Stakeholders Affected

• U.S. Taxpayers and Investors: Individuals, pension funds, and mutual funds with holdings in affected securities or property, who will pay more in taxes.
• Financial Institutions and Brokers: Required to provide notices and comply with SEC reporting, facing compliance costs.
• Foreign Entities: Companies in countries of concern may see reduced U.S. investment interest, impacting their access to capital.
• Government Bodies: SEC (for listings and rules), Treasury/IRS (for tax enforcement), and Congress (for oversight).

Notable Legal, Constitutional, or Political Implications

• Legal: Relies on existing IRC frameworks but introduces targeted exceptions, potentially leading to litigation over definitions (e.g., what constitutes "control" or "majority value") or IRS audits. The SEC's expanded criteria-setting role could face challenges under administrative law for vagueness.
• Constitutional: Raises questions of equal protection under the Fifth Amendment, as it singles out investments by nationality/geography without uniform application; however, national security justifications (common in foreign affairs) may uphold it under deference doctrines like those in trade or sanctions cases.
• Political: Reflects a bipartisan push for economic measures against geopolitical rivals, aligning with broader U.S. policies on supply chain security and sanctions, but could polarize debates on free markets versus national security.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Sen. Ricketts, Pete [R-NE]

Recent Actions

• 2025-06-12: Read twice and referred to the Committee on Finance.
• 2025-06-12: Introduced in Senate

Bill Versions

• No Capital Gains Allowance for American Adversaries Act — issued 2025-06-12 — PDF (6 pages)