A week after President Joe Biden announced a two trillion U.S. dollar plan to upgrade infrastructure and shift to green energy, he declared that he planned to raise another 1.8 trillion U.S. dollars to fund the American Families Plan. The proposed plan intends to cover nationwide childcare, preschool, paid family leave and tuition-free community college. This proposal is the second part of Biden’s “Build Back Better” plan. When ambitious policies such as this are proposed, support is guaranteed — until questions on how the plan will be financed are raised.

Biden has proposed to pay for his plan by doubling the capital gains tax on individuals earning over one million U.S. dollars. Under his policy, the capital gains rate will rise to 39.6 percent, substantially higher than the previous 20 percent rate. The top marginal income tax rate will also be revised from 37 to 39.7 percent, reversing the tax reduction that occured during President Donald Trump’s tenure.

Before we dive into the impact Biden’s proposed policy changes will have on the financial market, it is important to understand what a capital gains tax is. A capital gains tax is the tax accrued when an individual or corporation sells an asset and realizes a profit. This differs from an income tax as it is not collected yearly but only upon the sale of an asset. A capital gains tax varies between individuals depending on their income, marital status and other factors. Therefore, an increase usually affects the wealthier segment of a population, which is in line with President Biden’s initiative to reduce inequality.

As news about the tax plan broke, Wall Street investors were unnerved. The S&P 500 closed 0.92 percent lower, the Dow Jones Industrial Average slid 300 points and the NASDAQ fell 132 points. Brent Crude, which is the global benchmark for crude oil prices, fell 0.2 percent to 65.19 U.S. dollars per barrel. The biggest impact, however, was seen on the cryptocurrency market. The cryptocurrency markets lost more than 200 billion U.S. dollars when the tax plan was announced on Friday. Ethereum, arguably the second largest cryptocurrency after Bitcoin, lost 10 percent of its value as it fell to 2,140 U.S. dollars. Nick Spanos, founder of Bitcoin Center NYC, claims that the price of Bitcoin will fall further in the days to come as “crypto holders that have accrued gains will be subjected to this tax increment” and will subsequently exit the market in order to maximise their gain. Ruud Feltkamp, CEO at automated crypto trading bot Crypto Hopper, believes otherwise. He did not attribute the fall in the price of cryptocurrencies to Biden’s tax plan, but rather because “Bitcoin has only gone up for a long time, it is only natural to see a consolidation. Traders are simply cashing in on winnings.”

Along with Bitcoin, technology stocks that have seen large capital gains since the start of the pandemic are expected to take the hit as investors book their profits at current tax rates. Tesla shares fell 3 percent, Apple dropped 1 percent and Facebook slid 1.5 percent. As capital gains are taxed, investors are likely to opt for stable alternatives that guarantee dividends. However Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago, is optimistic that the sell-off is “not anything that is going to be a long-term disincentive to buy stocks.” This is because investors who unload their shares right now are unlikely to find attractive alternatives elsewhere.

Among the other losers are private equity executives and technology investors. These managers are rewarded in the form of “carried interest.” The carried interest is a performance fee given as compensation to the fund manager or partner from the profit booked by a fund. The carried interest is seen as a return on investment and not direct income and therefore is taxed according to the capital gains rate. It is argued that a fall in net carried interest caused by higher taxes will lead to a reduction in profitability. Private equity and venture capital are an important arm of the economy because they invest in growth and save for the future. A capital gains tax that reduces profitability incentivises consumption rather than investment — because of this, financial lobbyists are wary of it. Tim Draper, one of Silicon Valley’s best-known venture capitalists, tweeted that Biden’s tax plan might “kill the golden goose that is America/Silicon Valley.”

While a tax hike is expected to increase the revenue generated for the government, it is important to consider the tax avoidance that could arise. Tax avoidance, while morally questionable, is legal. In order to pay less in taxes, some individuals may use financial instruments to reduce their tax liability. According to the University of Pennsylvania’s Wharton School, one such method of tax avoidance is “step-up in basis” at death — which is exercised when an individual holds a portfolio of assets until their death. When the individual dies, the estate is transferred tax-free to its heir. As the assets are not sold, capital gains are not realized and so they are not liable for the payment of tax. If the tax rate is increased and the “step-up in basis” policy is not eliminated, the Internal Revenue Service (IRS) stands to lose 33 billion U.S. dollars. Eliminating the stepped-up basis would restrict avoidance opportunities and raise a supposed 113 billion U.S. dollars. Therefore, Biden’s tax proposal must be coupled with the removal of the “step-up in basis” if it wants to succeed.

Biden needs to convince not only opposing Republicans but also some Democratic senators. With the U.S. Senate evenly split, Biden’s tax policies face a tough road ahead. Nevertheless, cryptocurrencies and technology stocks that have seen substantial gains over the last year are likely to suffer if Biden’s policy makes its way through.