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I was watching a segment from CNBC on YouTube and was surprised by the fact that the government intends to make the tax rate retroactive after the law is passed so that the new tax rates will apply to stocks owned before the law was passed.

I was wondering if in criminal law, the passing of a law that makes punishment retroactive after the law was passed is also possible making it possible for past crimes to be punished in the United States.

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    Perhaps you meant "stocks sold before the law was passed" rather than stocks owned? The former would be retroactive and I think is what the video implies, but the latter is not retroactive if you owned a stock before but sell it after the law changes.
    – JBentley
    Commented Sep 18, 2021 at 1:19
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    If you don't make Capital Gains retroactive, then you'll see a massive spike of share-dumping right before the bill goes into effect. Backdating the "effective date" to when the law was proposed is then the inverse of an amnesty (e.g. if fireworks were made illegal without a license, but you had 3 months after the law started to either turn in your fireworks or apply for a license, without being penalised), to ensure a smooth transition.
    – Chronocidal
    Commented Sep 20, 2021 at 12:42

4 Answers 4

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No. This is black-letter constitutional law. From Article 1, section 9:

No Bill of Attainder or ex post facto Law shall be passed.

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    – Dale M ♦
    Commented Feb 1, 2023 at 1:37
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This is routine for tax laws, and leniency in criminal laws can be made retroactive, but criminal laws may not be made more strict retroactively (as this would constitute an ex post facto criminalization of conduct, as @Mark notes in his answer).

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    Do you know how tax laws manage to avoid the rule in Mark's answer?
    – JBentley
    Commented Sep 18, 2021 at 1:24
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    @JBentley The courts have defined "ex post facto law" as only being one that retroactively makes something a crime, increases the severity or punishment of an existing crime, or lowers the evidence needed to convict someone of a crime. A law that increases tax rates doesn't change anything about criminal law, so it is by definition not an ex post facto law.
    – cpast
    Commented Sep 18, 2021 at 1:55
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    Taxes change what is being owed, which is not a result of a crime but a result of being part of the country, which isn't criminal in nature.
    – Nelson
    Commented Sep 18, 2021 at 8:53
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    Suppose a tax law was passed in 2021 saying that if your name is Ross Presser, a tax of $5 is due for every minute of your life. I clearly couldn't pay such a tax bill, so passing such a tax bill immediately makes me delinquent in taxes. Isn't that making me a criminal by passing a non-criminal law?
    – Ross Presser
    Commented Sep 18, 2021 at 13:55
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    @RossPresser: Your example would work just as well with a non-retroactive tax: say, a law that directly levied a $5bn tax bill against you as an individual, due the day after passage, with no reference to any minutes of your life before that point. It's been argued that that would run afoul of the "Bill of Attainder" clause; and I think it would run afoul of the Fourteenth Amendment's "equal protection" clause; but even if not . . . not everything that's unacceptable is literally unconstitutional.
    – ruakh
    Commented Sep 18, 2021 at 15:19
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will apply to stocks owned before the law was passed.

There it is. They're talking about stocks you own now, and continue to own past the tax change.

Well, that's how capital gains work. The taxable event occurs when you sell.

That's because stocks can come back down. You don't know if you gained or lost until you sell. It just wouldn't work to tax capital gains on a stock you are still holding. Its value could fall after the tax was paid.

As such, changes in capital gains tax rate are not "ex post facto".

So if they change capital gains tax rates to 25% tomorrow, you are now "in the soup" with any securities you had not sold by today. There will be no way to avoid that higher tax rate.*

Even though the lion's share of the gains happened prior to the capital gains tax rate going up. Suppose in 1953 you acquired ExampleCo for $1/share. As of today, it is now worth $2001/share. If you sold it today, you post $2000 capital gains, and pay say 20% capital gains or $400/share.

But tomorrow, they raise the capital gains tax to 25%. You sell tomorrow when it's worth $2005/share, your gains are $2004 and your tax is $501/share.

Rich people are saying "we don't mind paying the 25% rate on the $4, we mind paying it on the $2000 since capital gains did occur when the tax rate was lower". *That logic fails, however. Because the capital gains were not, in fact, lower when it enjoyed the lion's share of its gains. Say the stock increased value 100x during a 40% capital gain period, and then another 20x during a 20% period. How do you even break that out? It's a mess.

OK, so the wealthy have a simple answer for that. They want to sell the assets today (e.g. at $2001)... capture their gains and pay the capital gain tax at the old lower rate (e.g. the $400)... and then re-purchase the assets at market (i.e. $2001). So if they sell tomorrow they only pay $4 of the higher capital gain. Nice try, but when that's done to avoid taxes, it's called a wash sale and the sell/buy is ignored.

* well, there sort-of is. You can donate the stock as a stock to charity. The charity will sell the stock, and since they sold it not you, they pay the capital gains, at the charity capital gains tax rate of 0%.

However, you get the full write-off at the appreciated value, not as a capital loss but as a proper deduction coming off plain income. And without having to pay capital gains tax. Crunch it both ways and include state tax, you don't make as much as simply paying the tax, but the charity gets a great deal more than you sacrifice.

Even the smallest charity can accept a stock gift, if you use a donor-advised fund as an intermediary. That is free, subsidized by people like me who leave funds parked there and pay 0.6% a year for the privilege.

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    Wash sale rules only apply to stocks sold at a loss
    – JonathanReez
    Commented Sep 20, 2021 at 5:20
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    The question is specifically referring to Biden wanting to back date the tax change to April, so if you sold in May expecting 20% capital gain tax, and in Nov they pass a law backdating 39.5% to April, your taxes doubled and you were not able to prepare for it.
    – rtaft
    Commented Sep 20, 2021 at 13:33
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    @rtaft The news story is reporting on hysteria about tax law changes, not tax law changes. As Mark pointed out, backdating isn't gonna happen.
    – Harper - Reinstate Monica
    Commented Sep 20, 2021 at 20:05
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The distinction between tax law and criminal law becomes immaterial the moment a person is charged with tax evasion (or any other punishable offense) per any portion of the tax code. Tax codes are therefore apt to become criminal law, and therefore equivalent arguments regarding ex post facto apply.

This observation is of course redundant since per the accepted answer by @Mark, ex post facto law of any kind is patently unconstitutional.

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  • No intelligent or informative rebuttals here...
    – pygosceles
    Commented Feb 9, 2023 at 16:25

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