The White House is contemplating bypassing Congress to allow taxpayers to index capital gains to inflation. This could result in a new $100 billion tax cut with impact to cost basis reporting.
The idea of inflation-indexed capital gains isn’t new to the Trump administration. In March, Wharton published a review of an earlier Trump proposal on the subject. In the blog post, Wharton estimates 63% of the tax benefit would be received by the top 0.1% and 86% by the top 1 percent. This would make passage of the tax break problematic for Congress. However, the Trump administration believes they can pass the break unilaterally by executive order.
From a cost basis reporting standpoint (isn’t that the only reference point that really matters?), inflation-indexing would pose a number of challenges, including the calculation itself, wash sales, corporate actions and the transfer process. If inflation-indexing were introduced retroactively, there could also be a short-term market impact as investors sell-off assets to take advantage of large reductions in the tax liability of long-term holdings.
At the moment, inflation-indexed capital may be just a trial balloon floated by the White House. We’ll provide more in-depth analysis of the impact on cost basis reporting if the prospects for inflation-indexing become more likely in the future.
The concept of inflation-indexed taxation, specifically on capital gains, has been around for decades. If you can’t get enough on this topic, the Tax Foundation discussed some of the challenges in this 2006 article and the CBO produced an in-depth analysis in 1990. For the truly wonky, the CBO report also includes a comparison of inflation-indexing to excluding a percentage of capital gains from taxation.