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Capital Gains Indexing for Inflation: Policy Outlook and Implications

Capital Gains Indexing for Inflation: Policy Outlook and Implications

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    Indexing capital gains for inflation has been a recurring topic in tax policy, though it has not advanced significantly. Despite bills pending in Congress and the first Bush Administration’s consideration of administrative action, conventional wisdom has held that it would require a vote in Congress to amend the tax law to make this change.

    Now, under the current Administration, proponents of indexing appear to see an opening. The influential group Americans for Tax Reform have written to President Trump urging that he use “executive authority to remove the inflation tax on savings and investment by indexing the Department of Treasury’s calculation of capital gains tax liability to inflation.” House Republicans followed with a letter to Treasury Secretary Scott Bessent echoing that the Administration could take action “defining cost basis in a manner that removes the unfair inflation tax on savings…” which “the Administration could undertake without additional legislation.”

    Senator Ted Cruz (R-Tx) has sponsored capital gains indexing bills for years. Most recently, the Capital Gains Inflation Relief Act of 2025 (S. 798) proposes indexing the cost basis of capital assets to inflation. This would allow taxpayers to adjust the purchase price of assets for inflation, ensuring only “real” gains—not inflationary “phantom” gains—are taxed, according to Cruz. Cruz’s bills have been referred to the Senate Finance Committee and have never made it to the floor for a vote.

    How Capital Gains Indexing for Inflation Works

    Indexing capital gains would be accomplished by increasing an asset’s basis by an inflation factor. Senator Cruz’s bill would use the gross domestic product (GDP) price deflator. This factor measures changes in the prices of goods and services produced in the United States, including those exported to other countries. Prices of imports are excluded.

    By increasing the basis for inflation, the appreciation applicable to inflation would be removed from the gain, lowering the gain and the tax. This adjustment would apply to capital assets such as stock, investment properties and digital assets.

    Example: An asset purchased for $2,000 that later sold for $6,000 would currently generate a $4,000 capital gain. Assume the inflation factor added $1,000 to the value. The adjusted cost basis would then be $3,000, and the taxable capital gain would be only $3,000.

    Can Capital Gains Indexing Be Implemented Through Treasury Regulations?

    Proponents of indexing argue that the Treasury Department could simply issue new regulations redefining the “cost” of an asset to include inflation adjustments. Others note that the Department of Justice in 1992 determined that Treasury did not have the legal authority to index capital gains by regulation. Instead, the Justice memorandum concludes that the power to change the definition of cost rests with Congress as part of its taxing power.

    During the first Trump Administration, Treasury Secretary Mnuchin indicated the Administration was studying the idea, but no action was taken, perhaps because then-Attorney General William Barr remarked it was beyond the scope of executive power. While the current Treasury Secretary has not publicly stated that indexing is under consideration, recent communications with the Administration signal that a renewed effort may be emerging.

    Economic and Policy Considerations of Capital Gains Indexing

    Some observers question why capital gains indexing was not in the 2025 One Big Beautiful Bill Act. One potential explanation is that indexing capital gains would affect the distribution of tax savings, skewing it toward more affluent taxpayers, which would have made the policy complex for Members of Congress to address. The Budget Lab at Yale University asserts, “Indexing capital gains would be regressive. The top 0.1 percent by income would see an average tax cut of about $350,000 while those in the bottom two quintiles would not benefit at all.”

    Republican lawmakers counter that “inflation indexing can help free up existing housing stock, encourage reinvestment in local communities, and support a healthier, more affordable housing market for first-time buyers and growing families.” Expect the economic debate to continue as Congress weighs in on these considerations.

    Outlook for Capital Gains Indexing Policy

    Although indexing capital gains for inflation has yet to progress through legislation, it remains an area of ongoing policy interest. With congressional action unlikely in the near term, evolving discussions around administrative authority may keep the issue in focus.

    As discussions continue to evolve, taxpayers should remain attentive to potential changes. Frazier & Deeter is closely monitoring this area and evaluating implications as they develop.

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