Trump considers indexing capital gains for inflation

Tax Hot Topics newsletterPresident Donald Trump recently confirmed he’s weighing a proposal to index capital gains to inflation, suggesting that doing so could help stimulate the economy.

The idea has split Republicans. Trump Economic Advisor Larry Kudlow has been a strong advocate, but prominent congressional Republicans like Senate Finance Committee Chair Orrin Hatch, R-Utah, have said such a decision should be left to Congress. The Tax Foundation, a right-leaning think tank, recently criticized the idea, and some Republicans worry that it could be easily reversed by future administrations or lead to less favorable indexing provisions affecting things like interest deductions. Last month, Treasury Secretary Steve Mnuchin said they are studying it, while other members of the administration have tried to walk back these comments and maintain that it’s unlikely in the near future.

The question of whether Treasury has the authority to index capital gains for inflation through regulation remains controversial. In 1992, the George H.W. Bush administration explored indexing capital gains to inflation through rulemaking. Essentially, Treasury would have promulgated a regulation interpreting “cost” under Section 1012 to mean the price paid adjusted for inflation. An analysis discussed whether the definition of the term “cost” in the statute was ambiguous enough to grant judicial deference to regulations on the issue. Treasury and the Department of Justice agreed that the meaning of “cost” was not ambiguous and Treasury did not have the authority to make the ruling.

Proponents of indexing capital gains to inflation argue that legal developments in the years since would now allow Treasury to implement the policy, including Supreme Court decisions on the deference for tax regulations.

Dustin Stamper
Managing Director, Washington National Tax Office
T +1 202 861 4144

Omair Taher
Senior Associate, Washington National Tax Office
T +1 202 861 4143

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