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.)
