Adjusting capital gains for inflation could prove a mess for individual investors
The notion of indexing capital gains for inflation sounds attractive, but the execution could be burdensome.
TL;DR
- Indexing capital gains to inflation adjusts the asset's basis for rising prices, so taxes are applied only to actual appreciation, not inflation-driven value increases.
- The idea is particularly appealing to long-term investors, potentially incentivizing them to hold assets longer and encourage portfolio rebalancing.
- However, implementing this would create substantial complexities, especially for assets like collectibles, real estate, and privately held companies, as well as for strategies like dollar-cost averaging and dividend reinvestments.
- While benefiting individual investors, indexing capital gains to inflation would lead to significant revenue loss for the government, making its political traction unlikely, especially for Democrats who are skeptical of the revenue cost.