A bipartisan group of lawmakers has introduced legislation that would index capital gains to inflation, meaning investors would only be taxed on real (inflation-adjusted) gains rather than nominal gains. The proposal has gained support from both parties for different reasons.
Under current law, an asset purchased for $100,000 and sold 10 years later for $150,000 generates a $50,000 taxable gain, even if $30,000 of that gain merely reflects inflation. The proposed law would adjust the cost basis for inflation, reducing the taxable gain to $20,000.
Proponents argue the change eliminates an unfair hidden tax that punishes long-term investors and discourages the reallocation of capital to more productive uses. The proposal is particularly beneficial for real estate investors and small business owners selling appreciated assets.
Critics contend the change primarily benefits wealthy investors and would reduce federal revenue by an estimated $150 billion over ten years. Progressive tax advocates argue the money would be better spent on programs benefiting lower-income Americans.
The Treasury Department estimates that inflation indexing would primarily benefit taxpayers over 55 who have held assets for extended periods. The proposal includes provisions to prevent abuse through artificial inflation of cost basis.
