As midterm elections approach, the idea of indexing capital gains to inflation has gained attention, particularly highlighted in a Wall Street Journal opinion piece. This proposal aims to adjust the basis of assets so that capital gains taxes reflect actual economic gains rather than inflationary increases.
Cary Sinnett, a certified financial planner, explains that under current tax treatment, selling a stock that appreciated from $100 to $102, with a 2% inflation rate, would result in taxes on the $2 gain, despite inflation accounting for much of that increase. Currently, the top long-term capital gains tax rate is 20%, plus an additional 3.8% for high-income earners.
The potential change could incentivize long-term investing, as investors may be more inclined to hold onto assets for longer periods to benefit from inflation adjustments. However, the complexities of implementing such a system could create challenges, especially for assets like collectibles or real estate, where tracking cost basis becomes more complicated.
Additionally, the Tax Foundation's analysis suggests that high-income households would benefit the most, with an average after-tax income boost of 0.4% by 2036, while lower-income households would see minimal gains.
Despite the appeal of this proposal, experts like Garrett Watson from the Tax Foundation express skepticism about its political viability, noting that significant revenue implications could hinder its progress, especially in a divided Congress