The “One Big Beautiful Bill” is now law, so what’s next?

Congress is working on new efforts to “DOGE” the federal budget, including considering a package of spending recessions from President Trump. 

Indexing capital gains is another tax idea that would deliver massive tax savings to households by eliminating tax penalties for “phantom” asset gains.

Capital gains are the profits from the sale or exchange of capital assets such as real estate, stocks or bonds, and personal items, such as jewelry and furniture. They represent the increase in the value from the price one paid for the asset and what he or she sold it for. Sometimes, asset holders incur losses at the sale of their assets. Realized capital gains are generally taxable unless they are sold at a loss.

Last fall, capital gains grabbed headlines when Democratic presidential candidate Kamala Harris was panned for proposing a 25% tax on unrealized capital gains for those earning over $100 million—a so-called billionaire minimum tax. 

As we explained at the time, this idea would be unfair, costly, and unnecessarily bureaucratic. The prospect of paying taxes on the value increase in unsold assets would create new headaches and hardships for Americans.

Instead of compounding the tax burden on Americans, conservatives could take a different approach: indexing capital gains for inflation.

Prices on goods have risen by over 20% during the last four years because of inflationary federal spending and lax monetary policy. Inflation increased the price tags for assets like homes without generating real gains.

Indexing capital gains for inflation would decrease the income subject to taxation, thereby reducing tax liabilities. This would buffer taxes on assets that prove to be unprofitable and serve as a hedge against stubborn inflation. 

Indexing capital gains is not a new idea. In 2019, Republican senators asked the previous administration to take up this charge. In a letter to Treasury Secretary Steve Mnuchin, they explained:

Currently, the methodology Treasury employs to calculate capital gains ignores gains resulting from inflation and ultimately hampers economic growth…

Under current rules, Treasury determines the basis by looking at the sticker price at the time of purchase without consideration of the inflation-adjusted cost of the asset in today’s dollars.

This means, in some cases, a taxpayer can face a tax liability even after suffering an actual loss.

Their words were prescient. Inflation began to skyrocket in mid-2021, cresting at a 40-year high of 9.1% in 2022. Now, taxpayers are on the hook for higher taxes due to stubborn inflation.

The federal government has recognized the corrosive impacts of inflation on household budgets and indexed various tax provisions for inflation. Capital gains should be next, as the Tax Foundation explained in 2018:

Many elements of the income tax are adjusted for inflation, such as tax brackets, standard deductions, and income thresholds or dollar amounts of some tax credits. However, the purchase price of assets later sold for capital gains or losses is not adjusted for inflation. As a result, inflation can do a real number on savers by turning real losses into taxable nominal gains.

With the wind on their backs from the passage of the OBBB, conservatives hope to resurrect this idea.

As the Washington Post reported this week, our sister group, Independent Women’s Voice, weighed in in support of the Trump administration taking action:

The Independent Women’s Voice, another conservative group, is expected to join the push. Heather R. Higgins, chair of the Independent Women’s Forum, said in a statement that “this is one of those good ideas that should be a no-brainer and nonpartisan. … Keeping these dollars matters to women, families, and small businesses.” Higgins added that the administration should make the change via executive order if passing legislation was not feasible.

Now is the time to take this idea back up again.

Bottom Line

The Trump administration and conservatives just delivered a historic tax win for women, housheolds, and small businesses through the “One Big, Beautiful Bill.” New savings from enhanced deductions and the elimination of taxes on tips and overtime augment now-permanent tax benefits from 2017. 

Now, it’s time to blunt inflation’s tax impact on assets by indexing capital gains for inflation.