Trump’s super-rich picks face huge taxes when joining his Cabinet — but could avoid it thanks to this little-known provision
Several prominent Wall Street executives are joining the Trump administration, a career move that could cost them not only millions of dollars in compensation but also a large tax bill if asked to sell asset. Fortunately for executives, there is a little-known tax rule that can soften the financial shock of becoming a government employee.
Among the wealthy executives likely to take advantage of the provision, known as a divestment certificate, are: Scott Bessent, founder of Key Square Capital Management, who Trump nominated to the Treasury Department; Cantor Fitzgerald CEO Howard Lutnick, whom Trump appointed to the Commerce position; and Linda McMahon, the former CEO of World Wrestling Entertainment who is set to lead the Department of Education.
Forced to sell
Government employees typically earn less, much less, than Wall Street executives. For example, Gina Raimonda, the current Secretary of Commerce, earns $203,500 in 2023, according to Open payroll. That compares with the $37 million earned last year by her would-be successor, Lutnick, as CEO of the brokerage. BGC Group and as executive chairman of Newmark Corporationa commercial real estate services company. (Done by Lutnick 17 million USD from BGC and 20 million USD from Newmark in 2023, according to regulatory filings.) That total does not include Lutnick’s salary from his private company Cantor Fitzgerald, meaning Lutnick’s total earnings in 2023 could be much higher .
Lutnick, along with other executives, will have to disclose their assets to the US government if they accept the nomination. They may have to divest some of these assets if regulators decide they could pose a conflict of interest. “When [the government] determines that there is a conflict, the agency will often say you need to divest,” said Robert Rizzi, a tax partner at the law firm Holland & Knight who advises executives entering the US government. said. He said options include selling the assets, giving them to someone or donating them to an organization.
For candidates approved by the Senate and selected for sale, there will be a supporting tax mechanism, called the tax mechanism. divestment certificate. CDs allow individuals to defer capital gains taxes on assets they are forced to divest. After the sale, operators have 60 days to reinvest the proceeds in an “authorized asset” that includes U.S. government obligations, such as a treasury or diversified mutual fund or fund. ETF.
For example, consider an executive who bought a stock at $5 and later raised it to $50 per share. If they sell, they typically have to pay taxes on the $45 gain. Using a divestment certificate, they would sell the stock for $50, put the proceeds into a diversified ETF or mutual fund, and pay no taxes. Otherwise, deferred gains will be triggered and the operator will have to pay tax, around 24%, on the $45 plus any other gains they earn. (24% includes 20% capital gains tax, plus 3.8% net investment income tax.)
The provision “is designed to soften the blow of involuntary asset sales by allowing individuals to defer collection,” said Robert Willens, a tax professor at Columbia Business School. profits as long as you commit the proceeds to similar assets.”
Only full-time federal employees, or their spouses and minor children or dependents, are eligible to use the CD facility. This means that Elon Musk and Vivek Ramaswamy, who are expected to hold informal roles in the new Government Effectiveness Board, will not be eligible.
Vulnerability or smart policy?
introduce In 1989, the divestment certificate was a provision to encourage talented people to join the government. A number of prominent Wall Street executives have used the mechanism, including many current members of the Biden administration. For example, Secretary of State Antony Blinken, Treasury Secretary Janet Yellen, Energy Secretary Jennifer Granholm and Defense Secretary Lloyd Austin have all sought to use the provision, according to one report. Office of Government Ethics Database.
Neither Willens nor Holland & Knight’s Rizzi consider the tax provision a loophole. Willens calls the CD a tax break for good reason, while Rizzii sees it as a mechanism to reduce the cost of serving in government. “There are a lot of deferral provisions in the tax code,” Rizzi said.
One of the most famous users of this term is Hank Paulsen, who was Goldman Sachs CEO, who in 2006 sold an estimated $500 million in GS stock, as reported by New York Times. Paulsen can defer $200 million in taxes Economic expert report. Paulsen served as Secretary of the Treasury during the George W. Bush administration, including during the great financial crisis of 2007-2008. He left in January 2009.
Some individuals may benefit from the tax provision. Rizzi singles out people whose net worth is tied to one or a handful of stocks. They can use the CD provision to diversify their portfolio without paying taxes. However, there is a possibility that the ETF or mutual fund they invest in may decline in price, while the original asset may still perform well. “There is a balance,” Rizzi said.
Whatever they decide, Willens said, users will eventually have to pay a 20% capital gains tax whenever they sell assets. But if they die and still own the stock, capital gains taxes will not be passed on to heirs. “The only way to avoid tax income is to die [owning the asset]he said.
