A number of prominent Wall Street executives are joining the Trump administration, a career move that could see them not only forgo millions in compensation, but also incur a big tax bill if they are required to sell assets. Fortunately for the executives, there is a little known tax provision that can soften the financial blow of becoming a government employee.
Among the wealthy executives in position to take advantage of the provision, known as a certificate of divestiture, are: Scott Bessent, founder of Key Square Capital Management, who is Trump’s nominee for Treasury; Cantor Fitzgerald CEO Howard Lutnick, who Trump has tapped for Commerce; and Linda McMahon, the former CEO of World Wrestling Entertainment, who is in line to lead the Education Department.
Forced to sell
Government employees typically make less, much less, than Wall Street executives. For example, Gina Raimonda, the current Secretary of commerce, earned $203,500 in 2023, according to OpenPayrolls. This compares to the $37 million made last year by her soon-to-be successor, Lutnick, as CEO of broker BGC Group and as executive chairman of Newmark Group, a commercial real estate services company. (Lutnick made $17 million from BGC and $20 million from Newmark in 2023, according to regulatory filings.) That total doesn’t include Lutnick’s paycheck from his privately-held firm Cantor Fitzgerald, which means Lutnick’s total earnings in 2023 are likely much higher.
Lutnick, along with the other executives, will have to disclose their assets to the U.S. Government if they accept the nomination. They may have to divest some of these assets if regulators decide they pose a potential conflict of interest. “When [the government] determine that there is a conflict, the agency will often say you need to divest,” said Robert Rizzi, a tax partner with law firm Holland & Knight, who advises executives joining the U.S. Government. Options include selling the assets, gifting them to someone or donating them to a foundation, he said.
For those nominees who are approved by the Senate and choose to sell, there is a tax mechanism to help, called a certificate of divestiture. A CD allows individuals to defer the capital gains tax for assets they are forced to divest. Once they do sell, the execs have 60 days to reinvest the proceeds in a “permitted property” which includes U.S. Government obligations, like treasuries, or a diversified mutual fund or ETF.
As an example, consider an executive who bought a stock at $5 that has since increased to $50 a share. If they sold, they’d typically have to pay tax on the $45 gain. Using a certificate of divestiture, they would sell the stock at $50, put the proceeds in a diversified ETF or mutual fund, and pay no tax. Otherwise, the deferred gain would be triggered and the executive would have to pay tax, around 24%, on the $45 plus any other gains they made. (The 24% includes a 20% capital gains tax, plus an additional 3.8% net investment income tax.)
The provision is “designed to soften the blow of involuntary sales of property by allowing individuals to postpone the gain as long as you commit the proceeds to similar property,” said Robert Willens, a professor of tax at Columbia Business School.
Only full-time federal employees, or their spouses and minor children or dependents, are eligible persons who can use the CD mechanism. This means Elon Musk and Vivek Ramaswamy, who are slated to hold unofficial roles heading up the new Department of Government Efficiency, would not qualify.
A loophole or smart policy?
Introduced in 1989, the certificate of divestiture is a provision meant to spur talented people to join the government. Several well-known 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 Secretary of Defense Lloyd Austin have each sought to use the provision, according to an Office of Government Ethics database.
Neither Willens nor Holland & Knight’s Rizzi view the tax provision as a loophole. Willens calls the CD a tax break with a reasonable purpose, while Rizzii considers it a mechanism to mitigate the cost of serving in the government. “There are tons of deferral provisions in the tax code,” said Rizzi.
One of the most famous users of the provision is Hank Paulsen, the former Goldman Sachs CEO who in 2006 sold an estimated $500 million in GS stock, according to the New York Times. Paulsen was able to defer $200 million in taxes, the 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 can benefit from the tax provision. Rizzi pointed to persons that have their net worth tied up in one or a small number of stocks. They can use the CD provision to diversify their portfolio without paying taxes. However, there is a chance that the ETF or mutual fund they invest in might tank, while the original asset could still be performing well. “There is a tradeoff,” Rizzi said.
Whatever they decide, users will ultimately have to pay the capital gains tax of 20% whenever they sell the assets, said Willens. But if they pass away, and still own the stock, the capital gains tax doesn’t pass to the heirs. “The only way to avoid the gain from taxation is to die [owning the asset],” he said.