A number of high-profile Wall Street executives are joining the Trump administration, a career move that could see them not only forgo millions in compensation but also a hefty tax bill if they have to sell assets. Fortunately for executives, there is a little-known tax provision that can soften the financial blow of becoming a government employee.
Among the wealthy executives in a position to take advantage of the provision, known as a sale certificate, are: Scott Bessent, founder of Key Square Capital Management, who is Trump’s nominee for Treasury; Cantor Fitzgerald CEO Howard Lutnick, Trump’s pick for Commerce; and Linda McMahon, the former CEO of World Wrestling Entertainment, who is slated 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, earned $203,500 in 2023. OpenPayrolls. That compares with the $37 million earned last year by her future successor, Lutnick, as the broker’s CEO. BGC Group and as executive chairman The Newmark Groupcommercial real estate services company. (Lutnick made 17 million dollars from BGC and 20 million dollars from Newmark in 2023, according to regulatory filings.) That total does not include Lutnick’s pay from his private equity firm Cantor Fitzgerald, meaning Lutnick’s total earnings in 2023 are likely to be much higher.
Lutnick, along with other executives, will be required to disclose their assets to the US government if they accept the nomination. It may have to sell some of those assets if regulators decide they pose a potential conflict of interest. “When (the government) determines there is a conflict, the agency will often say you need to exonerate,” said Robert Rizzi, a tax partner at the law firm Holland & Knight, who advises CEOs who join the U.S. government. Options include selling the property, gifting it to someone or donating to a foundation, he said.
For those candidates who are approved by the Senate and decide to sell them, there is a tax mechanism to help, the so-called confiscation certificate. A CD allows individuals to defer capital gains taxes on assets they are forced to sell. After they sell, the CEOs have 60 days to reinvest the proceeds in “permitted assets” that include U.S. government obligations, such as Treasuries or a diversified mutual fund or ETF.
As an example, consider a CEO who bought a stock at $5 that has since risen to $50 per share. If they sold, they would normally have to pay $45 in capital gains tax. Using a certificate of sale, they would sell the shares for $50 each, put the proceeds into a diversified ETF or mutual fund, and pay no taxes. Otherwise, the deferred gain would be triggered and the executive would have to pay tax, about 24%, on the $45 plus any other gain they made. (That 24% includes a 20% capital gains tax, plus an additional 3.8% tax on net investment income.)
The provision “is designed to soften the blow of an inadvertent asset sale by allowing individuals to defer the gain as long as the proceeds are channeled into similar assets,” said Robert Willens, a tax professor at Columbia Business School.
Only full-time federal employees or their spouses and minor children or dependents are eligible to use the CD mechanism. That means Elon Musk and Vivek Ramaswamy, who are slated to have unofficial roles at the helm of the new Department of Government Efficiency, would be ineligible.
Loophole or smart policy?
Presented In 1989, the forfeiture certificate was a provision meant to encourage talented people to join the government. Several prominent Wall Street executives 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 each sought to use the provision, according to Database of the Government Ethics Office.
Neither Willens nor Holland & Knight’s Rizzi consider the tax provision a loophole. Willens calls the CD a tax break with a reasonable purpose, while Rizzii sees it as a mechanism to mitigate the costs of serving in government. “There are tons of deferral provisions in the tax code,” Rizzi said.
One of the most famous users of the provision is Hank Paulsen, ex Goldman Sachs CEO who sold an estimated $500 million worth of GS stock in 2006, according to The The New York Times. Paulsen was able to defer $200 million in taxes Economist reported. Paulsen served as Treasury Secretary during the George W. Bush administration, including the Great Financial Crisis of 2007-2008. He left in January 2009.
Some individuals may benefit from the tax provision. Rizzi pointed to people whose net worth is tied to one or fewer shares. They can use the CD provision to diversify their portfolio tax-free. However, there is a chance that the ETF or mutual fund they are investing in could fail, while the underlying asset could still perform well. “There is a trade-off,” Rizzi said.
Whatever they decide, beneficiaries will end up having to pay a 20 percent capital gains tax whenever they sell the property, Willens said. But if they die and still own the shares, the capital gains tax is not passed on to the heirs. “The only way to avoid the gain being taxed is to die (owning the property),” he said.
