This bill rescales U.S. tax treatment for investments tied to a short list of geopolitical adversaries by removing capital-gains treatment for those assets and shifting gains and certain dividends into ordinary income tax treatment. It also removes the usual step-up in basis at death for the same assets and tasks regulators with identifying and publicizing affected securities.
The change raises the tax rate on a swath of cross-border holdings, creates new disclosure and list-maintenance duties for the SEC, and forces asset managers, brokers, and estate planners to reassess valuation, reporting, and portfolio strategy where exposure to the named countries exists.
At a Glance
What It Does
The bill adds a new Internal Revenue Code section that treats gains from sale, exchange, or other disposition of property tied to designated countries as ordinary income regardless of other Code provisions. It expands dividend rules to capture distributions from foreign corporations that meet the bill’s tests, denies a step-up in basis at death for qualifying property, directs the SEC to publish a list of affected securities and to require purchaser notice, and requires Treasury and the SEC to issue implementing rules within 180 days.
Who It Affects
U.S. taxpayers who own securities or other property that are incorporated, organized, located, controlled by, or economically dependent on entities in China (including Hong Kong and Macao, excluding Taiwan), Russia, Belarus, Iran, or North Korea. Broker-dealers, transfer agents, mutual funds and ETF sponsors with holdings tied to those jurisdictions, estate planners, and the SEC and Treasury are directly implicated by new reporting, notice, and rulemaking duties.
Why It Matters
By elevating tax rates on a defined slice of foreign-linked assets, the bill changes after-tax returns and could reduce U.S. investment into entities tied to those countries. The SEC’s list and notice requirements create operational compliance work for market intermediaries and may force portfolio rebalancing, valuation policy changes, and altered disclosure regimes for funds and brokers.
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What This Bill Actually Does
The bill changes how the tax code treats gains and some dividends when the underlying asset has a meaningful connection to one of six named countries. Rather than relying on existing capital-gains rules, it directs the IRS (through a new statutory hook) to treat such gains as ordinary income — which removes the preferential long-term capital gains rates and subjects those gains to ordinary income rates and withholding and reporting regimes that apply to ordinary income.
To operationalize that shift the bill ties the definition of covered property to a set of factual tests: incorporation or organization in a country of concern; a majority of assets or employees located there; ownership, control, or jurisdictional direction by the foreign government; economic dependency on companies in that country; or control through an ownership chain. Those multi-factor tests are delegated to the SEC and Treasury for criteria-setting and rulemaking, which means day-to-day determinations will ultimately depend on agency guidance and the SEC’s public list of affected securities.Practically, the new tax treatment changes behavior across several fronts.
Brokers and transfer agents will have to deliver notices when disposing of listed securities. Fund managers and custodians must reassess valuation and portfolio construction for funds with exposure to the listed countries; pass-through character of trades may shift; investors may face higher ordinary-tax bills and different loss-offset rules.
For estates, removing the step-up in basis turns lifetime unrealized gains on covered property into taxable amounts for heirs unless other planning steps are taken.Because the bill reaches both securities and non-securities property located or used in the designated jurisdictions, it pulls in a variety of instruments — including shares of foreign issuers, direct real property, and securities of companies whose value derives primarily from companies in the named countries. The Treasury and SEC rulemaking will be decisive in drawing lines for complex cases: multi-national conglomerates, ADRs, ETFs, and investment vehicles that mix covered and non-covered assets.
The Five Things You Need to Know
The bill creates a new Internal Revenue Code section that treats gains from the sale, exchange, or other disposition of specified country-of-concern property as ordinary income and requires recognition notwithstanding other Code provisions.
It defines ‘country of concern’ to include the People’s Republic of China (including Hong Kong and Macao, excluding Taiwan), Russia, Belarus, Iran, and North Korea and ties covered property to incorporation, asset/employee location, government control, economic dependence, or chain control.
The bill amends dividend rules to strip preferential capital-gains treatment from dividends paid by foreign corporations that meet the covered-property definition.
It denies the usual step-up in basis at death for covered property, preventing heirs from inheriting a stepped-up basis for those assets.
The SEC and Treasury must issue implementing rules and the SEC must publish a publicly available list of securities meeting the covered-property tests and require seller notice; agencies have 180 days to act, and the law applies to dispositions and dividends on or after January 1, 2026.
Section-by-Section Breakdown
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Short title
Gives the act the name 'No Capital Gains Allowance for American Adversaries Act.' This is the bill’s label only and carries no substantive legal effect; it signals legislative intent and frames the policy objective for regulators and taxpayers who will interpret subsequent provisions.
Treat gains from covered property as ordinary income
Operative text instructs that gain on sale, exchange, or disposition of 'specified country of concern property' is ordinary income and must be recognized irrespective of other Code provisions. Practically, that removes long-term capital gains status and any special exclusion/deferral mechanics that depend on capital-gains characterization. Tax preparers will need to reclassify realized gains and apply ordinary income tax calculations for covered transactions.
Definition of 'specified country of concern property'
Provides the five-part factual scaffold that determines coverage: (A) securities of entities incorporated/organized in a country of concern; (B) entities with majority assets or employees in that country; (C) entities owned/controlled or subject to government jurisdiction; (D) companies whose value depends primarily on companies described above; and (E) entities controlled through such companies. It also sweeps in non-security property located or used in a country of concern. The provision delegates the granular criteria and any exception mechanics to SEC and Treasury rulemaking, so implementation will be guidance-driven.
Dividends from covered foreign corporations lose capital-gains treatment
Edits the Code’s dividend preference carve-outs to add foreign corporations described in the new section to the list of payors whose distributions must be taxed as ordinary income rather than as qualified dividends. For dividend-paying investment vehicles, this changes after-tax yields and may affect withholding and reporting obligations for brokers and legacy dividend classification in custodial systems.
Denial of step-up in basis for covered property
Expands the list of property excluded from the basis-step-up rule to include specified country of concern property, meaning decedents’ built-in gains are not wiped away on transfer to heirs. Estate practitioners will need to model aggregate taxable exposure for heirs and revisit common estate strategies that previously relied on basis step-up to eliminate capital gains tax.
SEC must publish list of covered securities and require seller notice
Directs the SEC to publish on its website all securities that meet the covered-property criteria and authorizes the SEC to demand reports necessary to identify those securities. The SEC must also require sellers to notify counterparties that gains on the security are treated as ordinary income. Market infrastructure — trading platforms, broker-dealers, and transfer agents — will need to adapt to new disclosure flows and reconcile their position data against the SEC’s list.
Treasury and SEC rulemaking and application date
Requires Treasury and the SEC to issue implementing rules within 180 days and sets the effective date for dispositions and dividends on or after January 1, 2026. The short rulemaking window compresses agency timelines for technical definitions, administrative guidance, and coordination with existing international tax regimes, creating a tight compliance ramp for market participants.
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Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- U.S. Treasury — The shift from capital gains rates to ordinary income rates and denial of basis step-up will likely increase federal tax receipts on realized gains tied to the named countries.
- Domestic issuers and non-covered investments — Investors may reallocate capital toward U.S.-based or non-covered assets, potentially benefiting domestic firms through increased demand and investment flows.
- Policymakers and national-security stakeholders — The provision creates a tax-based disincentive aimed at reducing capital support to entities closely tied to geopolitical adversaries, aligning fiscal policy with strategic priorities.
Who Bears the Cost
- U.S. taxpayers holding covered securities or property — These investors face higher marginal tax rates on realizations and lose the estate planning advantage of basis step-up, increasing lifetime and intergenerational tax exposure.
- Asset managers, ETFs, and mutual funds — Managers will incur compliance, reporting, and possible rebalancing costs to manage covered exposure, update prospectuses, and accommodate purchaser notices and SEC lists.
- Broker-dealers and transfer agents — Firms must implement seller-notice procedures and reconcile transactions against the SEC’s published list, creating operations, systems, and training burdens.
- SEC and Treasury — Agencies must produce lists, rules, and potentially new reporting systems within a compressed 180-day timeline, which creates administrative costs and prioritization challenges for staff.
Key Issues
The Core Tension
The bill pits a national-security and foreign-policy objective — discouraging capital flows to certain foreign-linked entities — against financial-market efficiency, taxpayer fairness, and administrative feasibility: imposing domestic tax penalties may deter investment but also creates valuation complexity, compliance costs, and carve-outs that are hard to draw cleanly without harming innocent investors and market functioning.
The bill’s effectiveness depends heavily on agency rulemaking and the SEC’s list: the statutory tests are deliberately multi-factor and fact-specific, but the real-world reach will be determined by regulatory definitions and enforcement choices. That delegation means uncertainties (e.g., how to treat ADRs, multi-jurisdictional conglomerates, ETFs that blend covered and non-covered assets, or securities with minority-but-critical operations in a covered country) will persist until guidance or litigation provides answers.
The provision raises cross-cutting compliance and international-tax questions. Tax treaties, foreign withholding regimes, PFIC/CFC rules, and existing reporting regimes may interact unpredictably with the new ordinary-income treatment.
Fund valuation and NAV calculations could be disrupted if managers must mark covered holdings differently or reclassify realized gains. There is also a real risk of circumvention through ownership restructuring, jurisdictional shifts, or re-domiciliation — maneuvers that Treasury and the SEC will have to anticipate and close through careful rules and anti-abuse language.
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