Say I make an investment early in the year which is not subject to any capital gains taxes at that time. Come April, can the government say that those investments are now subject to capital gains taxes for that fiscal year?

As far as I know, the government can't "grandfather" taxes on gains made years prior, but what about gains made earlier in that same fiscal year?


You're certainly referring to "Ex Post Facto" laws, and while the US is constitutionally prohibited from passing criminal laws that are retroactive, the US Supreme Court has upheld many tax laws that apply tax code changes retroactively.

You might ask a similar question on Law.SE for a more thorough treatment of the legalities of congress passing those laws, but I will stick to the personal finance portion of the question.

What this means is that you can't expect that the current tax laws will be in force in the future, and your investment/retirement plans should be as flexible as possible. You may wish to have some money in both Roth and traditional 401(k) accounts. You might not want to have millions of dollars in Roth accounts, because if congress does act to limit the tax benefits of those accounts, it will probably be targeting the larger balances.

If you are valuing tax deductions, you should put slightly more weight on deductions that you can take today than deductions that would apply in the future.

If you do find yourself in trouble because of a retroactive change, be sure to consult a tax lawyer that specializes in dealing with the IRS to possibly negotiate a settlement for a lower amount than the full tax bill that results from the changes.

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    How far back has the Supreme Court upheld tax laws that apply tax code retroactively? Meaning, can the government pass laws that apply tax code retroactively going back an indiscriminate period of time, or only for that fiscal year? – user57744 Aug 7 '17 at 15:08
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    Nice answer. Although I agree with you on the Roth "scare", I'm pretty sure any member of Congress that voted to start taxing Roth distributions would not win a re-election, and within 2 years the law would be reversed by the new Congress. – TTT Aug 7 '17 at 15:27
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    @Eric In 1986, Congress retroactively removed a tax benefit that they established in 1980. It cost one investor $600,000. Sad for that guy. – NL - Apologize to Monica Aug 7 '17 at 15:31
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    @TTT If the move was to tax Roth distributions for accounts with a balance over $5 million, that would affect such a small percentage of the population that the political consequences wouldn't be as problematic as you think. – NL - Apologize to Monica Aug 7 '17 at 15:34
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    One more example from the blog of JoeTaxpayer. Though to be fair, this is retroactively changing a benefit, it is an example of congress pulling the rug out from under people counting on the current rules. – NL - Apologize to Monica Aug 7 '17 at 15:42

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