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Publication Date

Spring 3-29-2025

Abstract

The constitutionality of a tax on unrealized capital gains would be an issue of first impression at the U.S. Supreme Court.Two independent arguments can be made that such a tax is constitutional: (1) The 16th amendment to the U.S. Constitution authorizes the tax, and (2) a tax on income is not a direct tax and therefore the tax is authorized by Article I, Section 8, Clause 1 of the U.S. Constitution. In the event both arguments fail, a third option to achieve the same outcome could be used, namely, a tax similar to the individual mandate tax in the Affordable Health Care Act (ACA) that was upheld in Nat'l Fed'n of Indep. Bus. v. Sebelius. All three options would face a constitutional challenge. Two main issues under the first argument would arise: (1) Are unrealized capital gains income, and (2) Does the 16th amendment authorize a tax only on realized income? The second argument would require convincing the U.S. Supreme Court to overrule Pollock with the result that an income tax would not be deemed a direct tax in the absence of the 16th amendment. The magnitude of the tax penalty under the third option would provoke substantive due process concerns. Particularly strong arguments can be made in favor of the first two options. The third option would be more difficult to sustain and should be regarded as a last resort to save a tax on unrealized capital gains.

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