Potential Changes to Capital Gains Taxation

The Trump Administration is aiming to reduce capital gains tax, not by reducing the tax rate, but rather by indexing cost basis for inflation. Like many things in the tax code, such a change seems relatively innocuous, but the reality of what it could mean is $100 billion in reduced tax revenues for Uncle Sam (and $100 billion more in taxpayers pockets) over the next decade if enacted. Essentially, the proposal is that cost basis for any capital asset (stocks, rental properties, machinery, etc) would be increased at the time of sale to account for the inflation-adjusted purchase price. So, for example, if you paid $10K for stocks 30 years ago that are now worth $100K, normally you’d have a $90K capital gain. If that $10K 30 years ago is the same as $20K today, then under the proposed scheme, your capital gain would be $80K ($100K – $20K).

As you might have guessed, this doesn’t have the support of Democrats as it is a tax cut almost entirely to the wealthy (or upper middle class), so normally I would say that it has no chance. Recent history, however, shows that may not stop Republicans from pushing this though. Thus, we’ll be keeping an eye on it for our clients.

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