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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.

Sayaman
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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 Sep 18 '21 at 01:19
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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 Sep 20 '21 at 12:42

4 Answers4

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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.

Mark
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  • Comments have been moved to chat; please do not continue the discussion here. Before posting a comment below this one, please review the purposes of comments. Comments that do not request clarification or suggest improvements usually belong as an answer, on [meta], or in [chat]. Comments continuing discussion may be removed. – Dale M Feb 01 '23 at 01:37
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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).

ohwilleke
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    Do you know how tax laws manage to avoid the rule in Mark's answer? – JBentley Sep 18 '21 at 01:24
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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 Sep 18 '21 at 01:55
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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 Sep 18 '21 at 08:53
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    Of course, a law that makes exploiting a particular tax loophole a crime couldn't be retroactive. – nick012000 Sep 18 '21 at 09:29
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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 Sep 18 '21 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 Sep 18 '21 at 15:19
  • @ruakh: Arguably, such a huge tax would be so extreme as to constitute a de facto criminal penalty and/or taking, regardless of how Congress chose to characterize it. Compare and contrast NFIB v. Sebelius (a payment which is characterized as a "penalty" can still fall within Congress's taxation power, because Congress's specific choice of language does not alter the limits of their Constitutional authority - presumably, that works both ways). – Kevin Sep 19 '21 at 04:25
  • @Kevin That is highly hypothetical, however, because no tax increases proposed now or at any time in the recent past would be confiscatory. Also the fact that there have been top rates up to 90% of income that have been upheld as constitutional suggests that as a practical matter the concerns you raise don't arise. For criminal procedure purposes, it is the possibility of incarceration that is often the constitutional trigger for constitutional criminal procedure protections which don't apply to monetary fine cases. – ohwilleke Sep 19 '21 at 20:46
  • @cpast All law becomes "criminal" law the moment a government attempts to prosecute someone over it, so it is apparent the distinction is really just petty lawyerism. – pygosceles Jan 29 '23 at 02:03
  • @ohwilleke Could you cite why "criminal procedure protections" are being limited only to cases with a threat of incarceration? I don't see that in the Constitution anywhere. Even a twenty-one dollar civil case preserves the right to a jury trial. – pygosceles Jan 29 '23 at 02:13
  • @pygosceles The U.S. Constitution makes lots of distinctions between criminal and non-criminal prosecutions, for example, in the 6th Amendment to the U.S. Constitution. The threat of incarceration is how the courts have defined the difference between a civil and criminal prosecution. – ohwilleke Jan 29 '23 at 18:44
  • @ohwilleke That's nonsense and legal vaporware. All prosecutions are either civil or criminal. In civil suits, the plaintiff is a nongovernment entity that claims to have suffered injury and is seeking to recover damages from the accused, without respect to what statute attempts to define as acceptable or unacceptable behavior. By definition, a "criminal" case is one in which the plaintiff is the government, and the alleged damages are of life, property, or liberty of the populace or any of its members. The "courts" cannot define it to be otherwise; that would be a dereliction of their duty. – pygosceles Jan 30 '23 at 17:55
  • @pygosceles You aren't the person who gets to make up the definitions. The Courts do. And the U.S. Supreme Court which is the ultimate authority on what the U.S. Constitution means did. And the U.S. Supreme Court determined that a possibility of incarceration makes a case criminal rather than civil which is a perfectly reasonable definition. Disagreeing with you isn't a dereliction of their duty. It is just a difference of opinion on a legal matter than the courts always win. – ohwilleke Jan 30 '23 at 18:04
  • @ohwilleke According to Alexander Hamilton, the rules of legal interpretation are the rules of COMMON SENSE. We the people have a good helping of it, and those who are blinded by political aspirations too commonly do not.

    The Supreme Court does not create any binding decisions for anyone except the parties to the suits they hear. They wrote the fictitious precept of precedent to exalt themselves. Legislating from the bench is invalid, period.

     – pygosceles Jan 31 '23 at 16:29
  • @ohwilleke Those who deny the people the right to a jury trial or who redefine the rights of the people so as not to allow what God has granted or what the founding fathers clearly expressed are frauds.

    Per the Constitution, the Declaration of Independence, and the very law and spirit of America, in controversies between the people and their government, the people always win; Governments derive their just powers from the consent of the governed. No law can be enacted or enforced against them, nor can Constitutional protections ever be trammeled without their express consent.

     – pygosceles Jan 31 '23 at 16:31
  • @pygosceles Ha ha ha! If you want to delude yourself, have at it. God has nothing to say about American criminal procedure. The Declaration of Independence doesn't have any legal effect. You are naive to the point of being silly and amusing. – ohwilleke Jan 31 '23 at 16:53
  • @ohwilleke God delivered the Constitution to us and we are accountable to Him for how we hold the rights He has given to all men. What the Constitution clearly states, no judge can abrogate or deny. The will of the people is superior to the opinion of any judge. Case in point, the Constitution expressly states that no verdict in any criminal case shall be formed except by a jury of one's peers.

    Farewell and enjoy your medieval European monarchy or socialist authoritarian dystopia. Me and my friends will preserve our rights and will enjoy the liberty only our Creator gave for all.

     – pygosceles Jan 31 '23 at 17:09
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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.

Harper - Reinstate Monica
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    Wash sale rules only apply to stocks sold at a loss – JonathanReez Sep 20 '21 at 05:20
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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 Sep 20 '21 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 Sep 20 '21 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.

pygosceles
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