S. 2047: No Capital Gains Allowance for American Adversaries Act

This bill, titled the No Capital Gains Allowance for American Adversaries Act, aims to change how certain financial gains and dividends are taxed under the Internal Revenue Code. Here’s a breakdown of the main components of the bill:

Overview of Changes

The bill proposes that profits gained from the sale or exchange of assets related to certain countries deemed as countries of concern will not be taxed at the lower capital gains tax rate. Instead, these profits will be treated as ordinary income, which is typically taxed at a higher rate. The amendment will apply to gains recognized from January 1, 2026, onward.

Countries of Concern

For the purpose of this bill, the following countries are classified as countries of concern:

• People’s Republic of China (including Hong Kong and Macao, but excluding Taiwan)
• Russia
• Belarus
• Iran
• North Korea

Definitions of Specified Country of Concern Property

The bill introduces a definition for specified country of concern property, which consists of:

• Any securities (stocks, bonds, etc.) associated with companies incorporated or organized in a country of concern or those with significant assets or employees in those countries.
• Any property, other than securities, that is located or used in a country of concern.

Tax Implications for Dividends

In addition to the treatment of gains, certain dividends paid by foreign corporations that meet the criteria for specified country of concern property will also be subject to ordinary income tax rates rather than capital gains tax rates.

Step-Up in Basis at Death

The bill also proposes amendments regarding the step-up in basis rule at death, which normally allows an inherited asset to be valued at its market value at the time of inheritance rather than its original purchase price. The bill states that this cannot apply to specified countries of concern property, meaning such assets would retain their original basis for capital gains purposes.

Notice Requirements for Transactions

In transactions involving the sale or exchange of securities classified as specified country of concern property, the seller will be required to inform the buyer that the gains from the transaction will be taxed as ordinary income. This requirement aims to ensure that parties are aware of the tax implications before completing a transaction.

Public List of Affected Securities

The Securities and Exchange Commission (SEC) is tasked with creating and maintaining a public list of all securities defined under the conditions specified in the bill. This information will be available on the SEC's website to provide transparency to investors.

Regulatory Implementation

The SEC and the Secretary of the Treasury must establish rules and criteria necessary to implement these changes within 180 days of the bill's enactment.

Effective Date

These changes will take effect for dispositions of specified properties and the payment of dividends on or after January 1, 2026.

Relevant Companies

• BABA (Alibaba Group Holding Limited) - This company, incorporated in China, could be affected as its securities may be categorized as specified country of concern property.
• TCEHY (Tencent Holdings Limited) - Another major Chinese company that could see its profits taxed at higher ordinary income rates under this legislation.
• NIO (NIO Inc.) - This electric vehicle manufacturer based in China may be classified under the same rules affecting capital gains.
• RDS.A (Royal Dutch Shell PLC) - As a company operating in Russia, it could also be impacted by the changes to the tax treatment of dividends and gains.