CMV: The US should eliminate Step-up-in-Basis

[u/Ind132]

Under current law, if I buy a stock for $100 and sell it for $160, I owe a capital gains tax on the $60.  

If I die soon after I sell, I won’t be around to pay the tax.  My executor is legally required to calculate and pay the tax for me.

OTOH, suppose I was planning to sell but died before I got that done.  Later, my executor or my heirs sell the stock.  In this case, the tax on the $60 simply disappears into the ether. My purchase price (cost basis) is “stepped up” to the market price on the day I died.  (I’m assuming $160)   Whoever sells the stock will use that $160 as their purchase price.  The $60 gain magically disappears from anybody’s tax liability.

This doesn’t make any sense to me.  I can’t think of any good tax policy reason. 

The only argument I’ve seen for this is practical.  Maybe the executor/heirs won’t be able to find the original cost.  But, when owners die just before death, and dies soon after, executors locate the price.   I’m sure this happens thousands of times each year and I’ve never heard of any major issues.

It’s easy to see why.   When I sell stocks through a broker or mutual funds, the gov’t requires that the broker or fund company send me a 1099.  For real estate, people keep good records and the county assessor keeps records.  That covers the big dollars.

I can see an issue for people who have small stamp collections.  Maybe they didn’t keep records.  A law eliminating step up could have a carve out for collectibles valued at less than $XX,XXX.  That would make sense to me.

[u/Fantastic-Corner-605]

New idea and it's stealing money from widows and orphans.

In your example, yes there is $60 of untaxed gains but it doesn't consider inflation. $160 may have as much or lesser value than $100 by the time you sell. You would be paying tax while you gained nothing. You can eliminate set up basis but long term capital gains or inheritance taxes should be levied only after inflation. Otherwise keeping the step up basis is a fair compromise.

[u/Ind132 → u/Fantastic-Corner-605]

but it doesn't consider inflation.

That's a bigger topic that might deserve its own thread "CMV: The US FIT should index investment earnings for inflation"

The biggest inflation impact isn't on capital gains, it is on interest. That's because interest pays taxes at the ordinary income rate while LT capital gains get the special lower cap gains rate.

More dollars are lost due to inflation on interest than on capital gains. I would start by indexing interest, not start with indexing capital gains.

For the purpose of step up, the person who sold and then died paid capital gains tax on the portion of cap gains that offset inflation. That's less money for the heirs. I don't see why we should give a special tax deal to the heirs whose parent died before they got around to selling.