Top Wall Street Executives Set to Join Trump Administration, But at What Cost?
As several prominent Wall Street executives prepare to join the Trump administration, they may be leaving behind more than just their lucrative careers. In exchange for taking on high-level government positions, they could be forced to sacrifice millions in compensation and incur a substantial tax bill if they must sell assets deemed to pose a conflict of interest.
The Little-Known Tax Provision That Can Help
Fortunately, there is a lesser-known tax provision that can alleviate some of the financial burden. The certificate of divestiture allows individuals to defer capital gains tax on assets they are forced to divest, providing a soft landing for those making the transition from Wall Street to Washington.
Who Stands to Benefit?
Among the wealthy executives poised to take advantage of this provision are Scott Bessent, founder of Key Square Capital Management and Trump’s nominee for Treasury; Cantor Fitzgerald CEO Howard Lutnick, tapped for Commerce; and Linda McMahon, former CEO of World Wrestling Entertainment, in line to lead the Education Department.
The Financial Sacrifices of Government Service
Government employees typically earn significantly less than their Wall Street counterparts. For instance, Gina Raimondo, the current Secretary of Commerce, earned $203,500 in 2023, a far cry from Lutnick’s $37 million payday last year.
Forced to Sell: The Consequences of Conflicts of Interest
If regulators determine that an executive’s assets pose a conflict of interest, they may be required to divest them. This can lead to a significant tax bill, unless they utilize the certificate of divestiture. By doing so, they can defer the capital gains tax and reinvest the proceeds in a “permitted property,” such as U.S. government obligations or a diversified mutual fund or ETF.
A Reasonable Purpose or Loophole?
Introduced in 1989, the certificate of divestiture is designed to encourage talented individuals to join the government. While some may view it as a loophole, experts argue that it serves a reasonable purpose, mitigating the financial costs of serving in the government.
High-Profile Users of the Provision
Several well-known Wall Street executives have utilized the mechanism, including Secretary of State Antony Blinken, Treasury Secretary Janet Yellen, Energy Secretary Jennifer Granholm, and Secretary of Defense Lloyd Austin. Hank Paulson, former Goldman Sachs CEO, famously used the provision to defer $200 million in taxes when he sold an estimated $500 million in GS stock.
A Double-Edged Sword
While the certificate of divestiture can provide a financial safety net, it’s not without risks. Executives who diversify their portfolios using the provision may still face losses if their investments perform poorly. Ultimately, they will still be required to pay the capital gains tax, unless they pass away still owning the asset.
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