The answer to the second question is yes – Congress can pass retroactive tax increases and it has done so since the early 1900s. In some cases, the legislation was applied to the tax year before the year of enactment!
Many people think the two ex post facto clauses in the Constitution prohibit retroactive tax increases, but that is not the case. As one commentator stated, “[s]ince at least the early part of the 1800s, though, the ex post facto clauses have been interpreted as applying to criminal laws only.” Even though many people think tax increases are criminal, courts do not share that view.
But just because Congress can pass retroactive tax increases doesn’t mean it will. As we wrote previously, the conventional wisdom is that retroactivity is more likely for bills passed earlier in the year, and less likely for bills passed later in the year.
But conventional wisdom doesn’t address specific questions, so back to the question at hand – when would President Biden’s capital gains tax increase take effect? The answer, at least if President Biden has his way, is that the increase would take effect as of April 28, 2021.
According to press reports, the President’s expected $6 trillion budget ties the increase to the date the White House first released its fact sheet on The American Families Plan, which was on April 28, 2021. Thus, for households earning more than $1 million, the capital gains tax rate would increase from 23.8% to 43.4% as of April 28, 2021, thus eliminating the opportunity to recognize gain at current rates in advance of the legislation.
Keep in mind, however, that the President still needs Congress to agree to this retroactivity, and Democrats have a thin margin in the House and no room for disagreement in the Senate. We’ll have to wait and see how this plays out as the legislative process unfolds.