Kiplinger Tax Letter Warns Capital Gains Indexing Could Slash Taxes by $7,000 on a Single $200,000 Sale

Current law taxes nominal capital gains, treating the entire difference between sale price and original cost basis as taxable. Indexing would scale the original basis upward by cumulative CPI, shrinking the taxable gain when assets are sold. For example, an asset bought for $100,000 and sold for $200,000 after a decade could see basis rise to about $130,000, reducing taxable gain to about $70,000. At a 23.8% long-term rate, taxes could fall from about $23,800 to about $16,660. The proposal would be implemented via executive action, bypassing Congress, and would be more impactful with persistent inflation and longer holding periods. Legal authority has been questioned previously, with earlier Treasury action abandoned due to doubts about redefining cost under Section 1012.

"Current law taxes the full nominal gain on an asset. Sell something you paid $100,000 for a decade ago for $200,000, and the IRS treats the entire $100,000 as a capital gain. Indexing rewrites that calculation. The original basis scales up by cumulative CPI, so a 10-year holding period at recent inflation rates would push that basis to roughly $130,000, shrinking the taxable gain to about $70,000."

"At a 23.8% top long-term rate, that is the difference between owing roughly $23,800 and roughly $16,660 on the same sale. The longer the hold, the larger the cut. Inflation has compounded: CPI ran from 313.548 in April 2024 to 333.020 in April 2026, and headline PCE is currently printing 3.5% year over year with core at 3.2%. Persistent inflation makes the basis adjustment meaningful even on five-year holds and transformative on 20- and 30-year positions in real estate or index funds."

"This is the second attempt. The first Trump administration studied the same executive-action route in 2018 and 2019 and abandoned it after Justice Department lawyers raised doubts about whether Treasury can redefine "cost" under Section 1012 without legislation. A 1992 Office of Legal Counsel memo concluded Treasury lacked that authority. Supporters argue the legal terrain has shifted with the Supreme Court's Loper Bright decision narrowing agency deference."

"Prior Congressional Budget Office and Penn Wharton scoring put the 10-year revenue cost of indexing capital gains between $100 billion and $200 billion, with benefits concentrated among the top 1"

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