This legislation, known as the "Billionaires Income Tax Act," seeks to fundamentally alter how high-income and high-net-worth individuals are taxed, requiring them to pay taxes annually on their wealth accumulation. Its primary purpose is to eliminate tax planning strategies, such as "buy, borrow, die," which allow billionaires to defer tax indefinitely on appreciating assets.

The bill introduces a comprehensive mark-to-market taxation system for tradable covered assets held by "applicable taxpayers," meaning gains and losses are recognized annually as if the assets were sold at fair market value. For nontradable covered assets, certain transfers, including those that would typically be nonrecognition events like like-kind exchanges or transfers to controlled corporations, will trigger a "deferral recapture amount," which is essentially an interest charge on the deferred tax from prior years.

A significant provision treats gifts, bequests, and transfers of covered assets into trusts as deemed sales at fair market value, thereby triggering immediate tax recognition. This aims to prevent the transfer of untaxed appreciated assets to heirs. Exceptions are provided for transfers to spouses and charitable organizations.

The definition of an "applicable taxpayer" includes individuals with over $100 million in adjusted gross income or over $1 billion in assets for three consecutive years, as well as certain trusts and estates meeting similar thresholds. Special rules apply for taxpayers entering or leaving this status, including an option to pay initial tax liabilities in five annual installments.

The bill also addresses various other tax provisions. It removes the adjusted gross income limitation for the net investment income tax for applicable taxpayers and imposes special rules for covered expatriates. For pass-through entities like partnerships and S corporations, significant owners will be required to report and recognize their share of entity-level gains and losses, and certain nonrecognition transactions at the entity level are disregarded.

Furthermore, the legislation targets deferred compensation, imposing a deferral recapture amount on applicable deferred compensation when it becomes taxable, along with a 10% additional tax on severance pay. It also modifies the tax treatment of private placement life insurance and annuity contracts, taxing amounts received from them as income first, applying a 10% additional tax on early distributions, and repealing the exclusion for death benefits from these contracts.

Finally, the bill eliminates special tax treatments for certain investments. The exclusion for qualified small business stock under Section 1202 will no longer apply to applicable taxpayers, with an exception for stock acquired before September 17, 2025. Additionally, new investments in Qualified Opportunity Funds by applicable taxpayers or entities are restricted, and the basis step-up rule for 10-year QOF holdings is modified to prevent further deferral. These changes, along with the other provisions, are generally effective for taxable years beginning after December 31, 2025.