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 income tax rate under President Biden's proposal.. 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 be a surprise, although for some, the magnitude of the proposed tax increases is.

This proposal would apply to taxpayers with annual incomes above $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 higher taxable gains on those assets once sold.

Of course, the proposal has to be negotiated in Congress, so ultimately a more limited version of the proposed increase may be agreed upon. Furthermore, there are doubts about when it would take effect.

Some clues are offered by Goldman Sachs, which expects "Congress to settle on a more modest increase, potentially around 28%." While Congress may approve the proposal in its entirety, they believe a moderate version is more likely in light of the Democrats' slim majority in the House and Senate. 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 their view, a rate of 28% seems more likely, as it is roughly halfway between the current rate and Biden's likely proposal.

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