Bloomberg has reported that the Biden administration will propose raising the federal capital gains tax rate to 39.6%, as well as the top marginal tax rate on income under President Biden's proposed. In addition to the 3.8% tax on net investment income that Congress established in 2009, the combined rate would be 43.4%. The President was expected to propose this as part of his "American Families Plan". In that sense the announcement would not come as a surprise, although for some the magnitude of the proposed tax hikes is.

This proposal would apply to taxpayers with annual income in excess of US$1 million, and would likely also apply to qualified dividends, which are currently taxed at the same rate as capital gains.1 million, and would likely also apply to qualified dividends, which are currently taxed at the same rate as capital gains. The Biden campaign also proposed eliminating the step-up in basis on inherited assets, which would result in much larger taxable gains on those assets once sold.

Of course, the proposal has to be negotiated in Congress, so a more limited version of the proposed increase may eventually be obtained, and there are doubts as to when it would become effective.

Some clues are offered by Goldman Sachs, which expects "Congress to settle on a more modest increase, potentially around 28%....". While it is possible that Congress will pass the proposal in its entirety, they believe a moderate version is more likely in light of the Democrats' slim House and Senate majorities. At 43.4%, long-term capital gains would be taxed at the highest rate in the more than 100 years since Congress established the income tax. In his view, a 28% rate seems more likely, as it is roughly halfway between the current rate and Biden's likely proposal.

And while it is unclear when the tax rate increase would be effective, the bank's economists "believe it is unlikely to apply to gains earned before May, and an increase from January 1, 2022 is more likely."