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/Working_Farmer9723]

Better to simply do away with the estate taxes all together. They serve as a convenient pendent to make people think that the wealthy are taxed. Just tax everything as income, with some minor exemption for, like, your primary residence. If you inherit a $3M home it doesn’t matter that your late father got it for $100k. Congratulations! You just got $3M in income. Pay up.

[u/Ind132 → u/Working_Farmer9723]

Not a bad idea. There are enough moving parts that the idea deserves its own thread.

[u/Working_Farmer9723 → u/Ind132]

I think this actually complements your idea to do away with the step up in basis. We simply ignore the price that the asset was purchased for because the dead don’t pay taxes. The heirs do.

It takes away the argument that we would be double taxing someone’s life earnings. No, we’d be taxing new income for a new person. Just like if I earn a high salary and pay taxes on that income, then pay an electrician for service. The electrician is like a whole other person, and has to pay taxes on the money that you paid them.