SB 2845 (Billionaires Income Tax Act) rewrites how very high‑net‑worth individuals, their family offices, and related entities are taxed. The bill defines “applicable taxpayers” by multi‑year income and asset thresholds and then requires annual recognition of income on tradable assets (a mark‑to‑market regime), forces recognition (with an interest‑style recapture) when illiquid assets move in nonrecognition transactions, and treats most gifts, trust transfers, and transfers at death as deemed sales at fair market value.
Beyond annual taxation of unrealized appreciation, the bill layers in new reporting and anti‑avoidance rules for partnerships, S corporations, trusts, deferred compensation, and private placement insurance/annuity contracts; it also narrows longstanding tax incentives (including Qualified Small Business Stock and certain Qualified Opportunity Fund benefits) for taxpayers who become subject to the new regime. The changes are designed to stop “buy, borrow, die” strategies and take effect for taxable years beginning after December 31, 2025.
At a Glance
What It Does
The bill creates a new part of the Code that treats an individual as an "applicable taxpayer" based on a 3‑year lookback of income or assets, marks tradable covered assets to market at year‑end (and before certain nonrecognition events), and imposes a “deferral recapture amount” (an interest‑style tax) on transfers of nontradable covered assets. It adds detailed reporting and basis‑adjustment rules for pass‑through entities, special grantor‑trust rules, and targeted reporting for large deferred‑compensation and private‑placement insurance payouts.
Who It Affects
Individuals with modified adjusted gross income above $100 million (or $50 million MFS) for each of the prior three years, or whose covered assets exceed $1 billion (or $500 million MFS); significant owners of partnerships, S corporations, family offices, applicable trusts and estates; providers and holders of private placement life insurance/annuities; deferred‑compensation payors; and funds and startups using QSBS or Qualified Opportunity Fund incentives.
Why It Matters
The bill would force many ultra‑wealthy taxpayers to recognize gains annually and to report and pay tax they currently defer—changing incentives for financing, estate planning, long‑term holdings, and use of pass‑through entities. Compliance, valuation, and coordination with international tax rules are large operational issues for tax directors, trust officers, and compliance teams.
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What This Bill Actually Does
SB 2845 creates a new, self‑contained Part IV in subchapter E of the Code that applies only to “applicable taxpayers” — a category you reach by meeting an income or asset test for three consecutive prior years. Once inside that regime, the bill treats tradable covered assets differently from nontradable covered assets.
For tradable positions (publicly traded stock, exchange‑listed derivatives, or other assets the Treasury deems readily valu able), an applicable taxpayer recognizes gain or loss as if the asset were sold at fair market value at the close of each taxable year; the statute also treats certain nonrecognition events as triggering recognition immediately before the event. That is the mark‑to‑market element; it turns holdings that used to be untaxed until sale into annual taxable events.
Nontradable covered assets (private company equity, many partnership interests, direct real estate, and the like) do not get annual mark‑to‑market. Instead, the bill taxes transfers of those assets when they occur, including many transfers that previously qualified for nonrecognition (for example, certain exchanges or contribution events).
When such a transfer happens, the transferor recognizes gain as if sold immediately before the transaction, and the Code imposes an additional “deferral recapture amount” that is computed by allocating gain back across the taxpayer’s holding period, applying historic tax rates, and charging interest (using the underpayment‑rate methodology plus one percentage point). That recapture is capped as provided in the text but can substantially increase the tax on a formerly deferred gain.Pass‑through entities and trusts get heavy reporting and coordination rules.
A “significant owner” (5% owner or an owner with $50 million+ of nontradable interests) must notify the entity and in many cases report gains allocated by the entity; entities must report annually to applicable taxpayers with notices cascading up through tiered structures. Gifts, bequests, and many trust transfers by applicable taxpayers are treated as deemed sales at fair market value, subject to limited spousal and charitable exceptions; special rules apply to grantor trusts and to distributions from applicable trusts.
The bill also layers on administrative rules: a new election allows a taxpayer entering the regime to treat certain nontradable interests as tradable (subject to valuation rules), a first‑year tax can be paid in five installments under narrow rules, and the Secretary is given broad regulatory authority to prevent avoidance — including through valuation and tiered‑entity rules. Finally, Title II makes complementary changes: it removes AGI thresholds for the net investment income tax for applicable taxpayers, allows marked‑to‑market losses to be carried back under a special rule, imposes reporting for large deferred‑compensation payments (with a $5 million threshold), taxes certain private‑placement life insurance and annuity payouts for applicable taxpayers, and narrows QSBS and Qualified Opportunity Fund benefits for those taxpayers and entities.
The Five Things You Need to Know
An “applicable taxpayer” is someone who met either an applicable adjusted gross income test ($100,000,000, or $50,000,000 MFS) or an asset test (aggregate covered assets > $1,000,000,000, or $500,000,000 MFS) for each of the three immediately preceding taxable years.
For tradable covered assets the bill treats holding the asset at the close of any taxable year as a taxable event: gains and losses are recognized that year as if the asset were sold at fair market value (annual mark‑to‑market).
Transfers of nontradable covered assets that would otherwise be nonrecognition events trigger recognition plus a ‘deferral recapture amount’—interest computed by allocating gain across the holding period, applying historic tax rates, and using the underpayment interest method (section 6621(b) rates plus one percentage point); the recapture is subject to a statutory cap formula tied to top tax rates.
Gifts, bequests, and many trust transfers by applicable taxpayers are treated as deemed sales at fair market value (eliminating the general step‑up in basis), with narrow spousal and charitable exceptions and special grantor‑trust rules to limit avoidance.
New compliance layers: a taxpayer entering the regime can elect to pay an initial net tax in five annual installments; payors must file information returns for certain deferred‑compensation payments exceeding $5,000,000; severance income included in an applicable taxpayer’s income is hit by an additional 10% surtax.
Section-by-Section Breakdown
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Establishes the ‘Elimination of Deferral for Applicable Taxpayers' part
This is the structural core: the bill adds Part IV to Subchapter E and creates subparts for general provisions, definitions, and rules that apply only to applicable taxpayers and applicable entities. That new part sets out the three basic mechanisms—annual recognition for tradable covered assets (Sec. 491), recognition plus deferral recapture for nontradable covered assets on applicable transfers (Sec. 492), and special passthrough/trust rules (Sec. 493–494). Practically, this is where Treasury will look to write implementing regulations and where tax professionals will focus on classification and valuation rules.
Mark‑to‑market treatment for tradable covered assets
The section defines a taxable event for tradable covered assets as (1) holding the asset at year‑end if the taxpayer is an applicable taxpayer and (2) any disregarded nonrecognition event. It treats the event as a notional sale for fair market value either at year‑end or immediately before a nonrecognition event and requires proper basis adjustments for later dispositions. The provision leaves significant rulemaking to Treasury on character (ordinary v. capital), how to determine fair market value, and how to handle derivatives and holding period carryover.
Deferral recapture when nontradable assets move in nonrecognition transactions
This is the engine for taxing privately held wealth. When an applicable taxpayer effectuates a disregarded nonrecognition transfer of a nontradable covered asset, the taxpayer recognizes gain as if sold immediately before the transfer and the Code increases the taxpayer’s tax by a separately computed deferral recapture amount. That recapture is built by allocating the gain back across the holding period, multiplying allocated portions by the tax rates in effect when the gain would have accrued, and then computing interest from each year’s filing due date to the transfer date using the underpayment interest rate plus one percentage point; the statute also caps the recapture by an ‘applicable percentage’ formula tied to statutory rate limits.
Pass‑through and significant‑owner reporting; entity/owner coordination
The bill forces communication between pass‑through entities and significant owners. A significant owner (5% owner or $50M+ nontradable interests) must notify entities; entities must report the owner’s share of notional mark‑to‑market amounts and transfers of nontradable assets, including holding periods and basis adjustments. Tiered structures trigger cascading notifications so owners further up the chain receive the information they need to include gains on their returns. The Secretary gets rulemaking authority to simplify aggregation and to prevent deliberate reporting delays; failure to file notices carries consequences that can force owners to recognize amounts on their own returns.
Deemed sales on gifts, bequests, and many trust transfers
Most transfers by applicable taxpayers—gifts, transfers in trust, and transfers at death—are treated as taxable sales at fair market value, subject to limited exceptions for transfers to a U.S. spouse, qualifying charitable transfers, certain disability/cemetery funds, and specified split‑interest arrangements. The transferee’s basis is generally the fair market value taken into account by the transferor, with a tailored exception for transfers on death to spouses. The bill also carves out specific rules for grantor trusts and provides for deferred recognition in some grantor trust contexts; this section is the statutory route to ending the general step‑up in basis for taxpayers subject to the new regime.
Who is an applicable taxpayer (three‑year lookback; trusts; expatriates)
Defines applicable taxpayers with a three‑year lookback: either meet the income test ($100M AGI; $50M MFS) for each of the prior three years or the asset test ($1B aggregate covered assets; $500M MFS). It also defines applicable trusts by lower thresholds, provides rules for married filing status and early termination elections, sets special rules for non‑resident aliens and covered expatriates, and gives Treasury authority over valuation and information reporting needed to determine status. The three‑year lookback and carryover rules are what move a taxpayer from intermittent to sustained coverage under the regime.
Carryback of marked‑to‑market losses; deferred compensation, insurance, QSBS, and QOF changes
Section 102 creates a special carryback for ‘marked‑to‑market’ losses of applicable taxpayers so marked losses can be carried back three years but only up to marked‑to‑market gains in those years. Title II removes the AGI limitation on the Net Investment Income Tax for applicable taxpayers, adds rules to tax certain deferred compensation (including a deferral‑recapture calculation and a 10% addition on severance), requires reporting of large deferred‑compensation items, tightens treatment for private‑placement life insurance/annuities (including removal of the exclusion for death benefits in specified cases), and narrows QSBS and QOF benefits for applicable taxpayers and entities.
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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
- Federal Treasury: accelerates realization of taxable income and creates a new tax base (annual mark‑to‑market and deferral recapture) that will increase near‑term tax receivables compared with current ‘realization’ rules.
- Investors who compete with highly leveraged, tax‑sheltered owners: by removing the tax advantage of living on loans secured by appreciating assets, the bill reduces tax‑driven distortions in competitive markets.
- Tax compliance and valuation professionals: increased demand for valuation services, tax reporting, and specialized compliance advice (family office tax directors, trust officers, partnership accountants).
Who Bears the Cost
- Applicable taxpayers (high‑net‑worth individuals and their estates): must recognize annual gains, pay recapture interest on illiquid transfers, face loss of step‑up in basis, and incur compliance costs.
- Family offices, partnerships, and private companies: new reporting obligations, basis adjustment mechanics, and possible tax allocations create administrative and cash‑flow headaches.
- Startups and Qualified Opportunity Funds: narrower tax incentives for wealthy investors (QSBS limitation for acquisitions after Sept. 17, 2025; tighter QOF elections) could reduce certain pools of capital.
- Private placement life insurers and annuity issuers: changes to tax treatment and reporting of payouts to applicable taxpayers will affect product design and pricing.
- Trust administrators and estate counsel: grantor trust, deemed sale, and basis rules increase fiduciary work and litigation risk in valuations and allocations.
Key Issues
The Core Tension
The central dilemma is between taxing economic wealth when it accrues (fairness and revenue) and the practical problems of collecting tax on unrealized or illiquid appreciation (liquidity drains, valuation uncertainty, and potential chilling effects on long‑term investment). The bill chooses immediate taxation for the wealthy at the cost of creating complex, enforcement‑heavy rules that will shift the compliance burden onto taxpayers, intermediaries, and the IRS.
The bill tackles tax deferral by forcing recognition of gains for wealthy taxpayers, but it pushes hard into valuation, liquidity and cross‑border regimes. Valuing nontradable assets annually (or at deemed transfer points) is inherently judgmental; the statute delegates valuation conventions and anti‑avoidance rules to the Secretary, which creates implementation risk and likely litigation.
The deferral recapture formula layers historic tax rates and an interest computation tied to underpayment rates plus one point; that produces a hybrid that behaves like an interest charge but is calculated from a retroactive allocation of gain — administratively complex and prone to disputes over holding‑period allocations, partial dispositions, and tiered ownership.
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