For two decades, booming stock, housing, and private business markets have driven large capital gains in the United States. Real capital gains, which are the inflation-adjusted appreciation of a financial or physical asset, have averaged 20 percent of national income over the past two decades, compared to 5 percent prior to 1980. In 2021 alone, according to calculations using IRS and financial accounts data, capital gains totaled almost $6 trillion—a whopping 39.2 percent of national income.

Clearly, capital gains are becoming increasingly relevant to many U.S. households’ bottom lines. But who is actually receiving this money? And how does it affect already-widespread inequality in the United States? Our new working paper, which was funded in part by the Washington Center for Equitable Growth, seeks to answer these questions.

Capital gains are different than other forms of income for two reasons. First, they are extraordinarily concentrated, mostly flowing to the top income percentiles. And second, they are difficult to measure, which is partly why most studies of inequality do not include capital gains as part of their income series.

Using internal IRS tax return data, under a data-use agreement with the IRS under the Joint Statistical Research Program, our paper studies the distribution in the United States and their contribution to both income inequality and tax progressivity. Using IRS data offers many advantages—the data are comprehensive, spanning the entire income distribution and wealth distribution in the United States.

At the same time, however, only realized sales of assets are reported on tax forms since the United States only taxes capital gains upon realization—though not all realized sales are taxed (for example, taxes are deferred on the return to assets held in retirement accounts, and the first $250,000 of a gain from the sale of a primary home is exempted entirely). This means a large portion of total appreciation, or the sum of unrealized and realized capital gains, is unreported in these data.

Read the full article about capital gains taxes by Jacob Robbins, Cole Campbell, and Sam Wylde at Equitable Growth.