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Will indexation relief be introduced for calculating US capital gains?

Private Clients - 01 Aug 2018

Where, as in the U.S., the measure of capital gain is the excess of proceeds over original cost, a taxpayer can legitimately argue that he is being taxed on more than his gain in real terms due to the failure to take into account the effects of inflation. For example, if A purchases land in 1990 for $100 and sells the land in 2018 for $200, a period during which U.S. prices increased by 93%, all but $7 of his $100 “gain” is attributable to inflation rather than to an increase in the real value of the property.  It can be argued that in a perfect taxing system inflationary increases should be recouped tax-free, and this can be achieved by “indexing” basis, i.e. adjusting it to reflect inflation/deflation over the period property has been held. Indexation relief has in the past been provided by other countries – most notably the UK (which applied such a relief for individuals up to 6 April 1998 and for corporates up to 1 January 2018).

However, introducing a system of indexation is complicated. Although the failure to index can result in injustice, on average by charging a reduced rate for long-term capital gains (currently 20% as against 37% charged on ordinary income) that injustice is redressed. 

In the current US Congress, a bill has been introduced by a Republican representative to index basis in the determination of gain.  Like many bills introduced in Congress, this is merely a gesture since for reasons that we’ve commented on previously there is at present no prospect of such legislation being approved.  Of more immediate concern is the recent statement of Treasury Secretary Mnuchin that if such legislation fails, the Treasury Department will reconsider whether it has the authority to issue interpretive regulations that would provide for indexation of basis.  (The Treasury last considered this possibility during the G W Bush administration, concluding, in our opinion correctly, that it lacked such authority.)

When this was reported, unnamed White House sources responded that such “Presidential” indexation was not currently under active consideration by the administration.  However, where there’s smoke there’s occasionally fire.  In view of the President’s likely inability to achieve significant legislative progress on most fronts, the possibility of achieving change by other means may become more attractive.

U.S. taxpayers who are considering disposing of assets that have been held a long time should therefore bear in mind the possibility that indexation will be introduced.

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Jeffrey Gould

Jeffrey Gould


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