This exercise quickly gets complex with additions to basis through, for example, reinvested dividends or new investments in a business. Capital gain would be defined as the difference between the sale price and the indexed basis. The Administration has not released a specific proposal yet, but past proposals to index capital gains for inflation would multiply the basis (or cost) of capital assets by a factor that represents the increase in the overall price level since purchase.
Indexing capital gains is surprisingly complex Indexing capital gains alone would be an extremely regressive tax cut.Indexing capital gains would add to our burgeoning debt unless accompanied by offsetting tax increases or spending cuts.Indexing capital gains without indexing interest expense and depreciation creates opportunities for tax sheltering.Capital gains are affected less by inflation than other kinds of capital income.There are a host of problems with applying inflation indexing only to capital gains, but here are the big ones:
And it would do all this without the approval of Congress.
It would cut capital gains taxes by up to $20 billion a year for the richest Americans and open the door to a raft of new, inefficient tax shelters. Were it feasible, it would make sense to measure all income and expense in real terms. But indexing capital gains alone by executive fiat while leaving the rest of capital taxation unchanged would make no sense. National Economic Council chair Larry Kudlow reportedly wants the IRS to redefine capital gains to include only returns from the sale of assets in excess of inflation (or to “index capital gains”).