The Trump administration has announced that it wants to index the system for taxing capital gains for inflation going forward.
Currently, individuals are taxed at 20%, 15% or 0% on long-term capital gains based on their income levels for the year. Individuals are generally taxed on the entire amount of gain, which is calculated by subtracting the client’s basis in the investment (usually the original purchase price) from the amount that the client received upon sale or disposition of the asset.
Despite this, many assets appreciate in value over time for a variety of reasons, and when an asset is held over a long period of time, inflation will likely play a role in the asset’s eventual sale value. Because of this, the administration wants to tie the system to an inflation-indexing system similar to the one that increases the value of many other tax items each year, including Social Security payments and permitted tax-free retirement account contributions.
We asked Professors Robert Bloink and William Byrnes, who are affiliated with ALM’s Tax Facts, and hold opposing political viewpoints, to share their opinions on the potential ramifications of indexing the capital gains tax system for inflation.
Below is a summary of the debate that ensued between the two professors:
Byrnes: I’m all for indexing capital gains for inflation. In fact, NOT indexing capital gains for inflation unfairly penalizes clients who hold capital assets where the primary value in doing so is appreciation in value over time. Income tax brackets for ordinary income are adjusted for inflation every year to avoid increased tax liability generated solely because of inflation, I see no reason why capital gains shouldn’t have a similar mechanism to account for inflation.
Bloink: This is just another Trump ploy to provide tax breaks for the extremely wealthy. Indexing capital gains for inflation would solely benefit the very wealthy and add a huge amount to the federal deficit. The actual capital gains tax brackets technically already have an inflation indexing component, because they are tied to the ordinary income of the taxpayer who sells the asset.