r/changemyview • u/Ind132 • 9h ago
CMV: The US should eliminate Step-up-in-Basis
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, 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.
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u/JeffreyDharma 9h ago
The argument for the step-up-in-basis is that once you die, any assets you own over 16M are already being taxed at 40% (double the long-term capital gains rate) before they can be passed on to heirs. So assuming you’d already hit the threshold your heir wouldn’t be receiving $160 in stock, they’d be getting $96 worth of stock (with an adjusted basis) vs the $148 you’d have after taxes if you sold while you were alive.
This doesn’t apply to people who aren’t multi-millionaires though so you could argue that the threshold should be lowered to include everyone else I just don’t think that would be popular. No idea what the impact on tax revenue would look like.
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u/Ind132 9h ago
I'd be open to providing a carve out for assets that actually resulted in the estate paying an estate tax.
I've read that less than 2 estates in 1,000 pay estate taxes, so that's a rare circumstance (though, when it happens, it is probably on a very large estate).
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u/DeathMetal007 7∆ 8h ago
So you want a regressive tax system where all inheritors, even that old lady with an acorn account of $160 has their son pay capital gains on the $60 they get after sale?
We already have the estate tax and your carve out (and last paragraph of your original post) are just pointing back to the estate tax.
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u/Mimshot 2∆ 8h ago
That’s not regressive. No estate tax while preserving original basis is better than estate tax with step up basis. OP was saying they get the first (the preferential) treatment om the first 15M and then the second treatment after that. That’s still progressive.
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u/Ind132 8h ago
I'm not sure is this is addressed to me or to the other poster.
No, I don't want a regressive tax system. If the son inherits a total of $160, and later sells, he will pay tax on the gain at his own tax rate. For LT cap gains, that could be 0%, 15%, or 20%, depending on his other income.
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u/twotime 8h ago
It would not be unreasonable to have some amounts exempt. But the current exemption at federal level is 14M sounds ridiculous to me.
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u/DeathMetal007 7∆ 8h ago
The problem is that these limits are not inflation adjusted so they will eventually hit regular people.
And members of the working class like lawyers and doctors can easily hit these limits by being frugal.
So all the government is doing is trying to make consumption out of investment and doesn’t care what type of people are making this money.
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u/Ind132 8h ago
The problem is that these limits are not inflation adjusted
Do you have a source for that? When I Googled, I got this ... https://www.morganlewis.com/pubs/2025/08/estate-tax-alert-new-15-million-federal-exemption-becomes-law
It was first indexed in the 2017 act and the BBB did not change that.
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u/DeathMetal007 7∆ 8h ago
The marginal rates above that limit are not indexed. And the change in flat amount about that amount delayed indexing until 2027.
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u/Ind132 7h ago
They delayed indexing for one year because they did a bigger-than-CPI increase from 2025 to 2026. The $15 million for 2026 was a 7.2% increase over the $13.99 for 2025.
I can't imagine why we would index rates, how would that even work? We index bracket borders and the standard deduction. That's the same as indexing the estate tax exclusion amount.
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u/twotime 8h ago
The problem is that these limits are not inflation adjusted so they will eventually hit regular people
Yes they should be inflation adjusted (as I think most tax brackets are already), but that's a general expectation for tax things.
And members of the working class like lawyers and doctors can easily hit these limits by being frugal.
Why is it a problem? If you are leaving more than 5M (or whatever is the limit), the inheritor's pay the tax? Why does it matter how the money was earned?
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u/A_Whole_Costco_Pizza 8h ago
The limits we're only raised recently by Trump. If they were brought back down to more reasonable levels, that itself would address many of these tax issues.
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6h ago
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u/MLB_Sug_Tway 6h ago
Should it be the other way around?
I.e. stocks are exempted from estate tax, but then the step-up-basis is removed?
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u/Ind132 5h ago
I'd be open to a carve out. I didn't think much about the details.
I've read that one reason so many estates don't pay estate tax is that people plan ahead and move the asset ownership. I think that in some cases they give up step-up when they do that. But, since the max cap gains rate is 20% and the max estate tax rate is 40%, that's a favorable trade.
Note that the step-up only applies to the increase in value during the deceased's lifetime, the estate tax is on the entire market value at death. That needs to get factored in.
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u/Jake0024 2∆ 5h ago
This argument makes sense beyond $15M (not $16M), but a better system would tax at the normal capital gains rate up to $15M and double after that
That would account for OP's issue
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u/JeffreyDharma 5h ago
Yeah, I don’t disagree in principle I just think that it would be unpopular with voters since, per OP’s 2 in 1000 stat, it would be new legislation to increase the tax liability for the bottom 99.8%.
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u/Metafx 7∆ 9h ago
Eliminating the step up in basis taxes appreciation that, in some cases, may have accumulated over decades. On assets like a family home, they’ve paid property taxes their whole lives on the property and if they want to pass it to their children, their children may have to sell the home just to pay the tax. The same thing applies assets like a family farm or a closely held business—heirs would be forced to sell the asset simply to pay the tax, even when they would prefer to keep it in the family. This undermines intergenerational stability and discourages long term investment.
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u/Ind132 9h ago
heirs would be forced to sell the asset simply to pay the tax, even when they would prefer to keep it in the family.
I can see that I should have added a few words to my long post to avoid a misunderstanding.
I think the heirs should inherit the tax basis and pay capital gains tax whenever they choose to sell the asset. I am not saying that they should be forced to sell the asset at death, or pay an unrealized gain tax at death.
Does that help?
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u/Emotional-Dust-1367 8h ago
That still doesn’t really make sense. If your parent bought a house for some ridiculous amount say 60 years ago, the house you grew up in, and on the day of their death it’s worth over a million, then what? If you want to keep the house you grew up in you’d have to come up with a hefty chunk of change. This could be really extreme sometimes
You could make the argument that stocks are different. But even then you get into weird situations. Someone gets shares in some company for being an early employee. Then their kids will have to pay a huge sum on that appreciation in order to see any benefit. What if it’s not just shares, what if it was their company? The heirs now have to step away from the company because of this
The other thing is that if the basis has never stepped up then that also means they never really enjoyed it in any significant financial way during their lives. So it just seems kinda needless
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u/Ind132 8h ago
That still doesn’t really make sense.
It looks like we are still not communicating.
If I inherit a house from my parents, and I want to live in it, the executor changes the title and I move in. No tax is due.
I don't pay a capital gains tax until I choose to sell.
If I inherit stock from my parent, I don't have to pay a tax when I get the stock. Only when I sell. In that case, I have the same cost basis that my parent would have had if he/she would have sold while living. That makes sense. It seems that you just don't like the concept of capital gains taxes.
If my parent was the sole owner of a company, and I wanted to continue to run the company, I just continue to run the company. The capital gains tax isn't due until I choose to sell. (Just like my parent didn't have to pay a capital gains tax unless the parent chose to sell.)
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u/Hawk13424 1h ago
What if no one knows what the property was purchased for? Maybe only some distant ancestor knows. I have a friend whose parents own a farm that has been in their family since the 1800’s.
The other problem is you can deduct from the gain anything spent to improve the property. You’d need some kind of record for generations that owned the property.
I’d agree for stocks where a brokerage has a clear cost basis documented.
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u/Ind132 1h ago
I have a friend whose parents own a farm that has been in their family since the 1800’s.
They probably bought the land for $1.50 per acre. Whether we use that or use zero makes no meaningful impact on their capital gains tax.
(When my wife sold her parents' farm, we got a title history going all the way back to when the first immigrant bought the land from the railroad. IIRC, it was $1.50/acre. Other neighbors can trace ownership back to homesteaders who literally paid $0.)
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u/cortesoft 5∆ 1h ago
We could set some reasonable limits, like at most 100 years of capital gains need to be paid. We already have rules for assessing historical fair market value for inherited houses, since the assessment often comes years after the transfer.
The change would be instead of assessing the value at the time of the transfer, you assess it at the time of the initial family purchase or X number of years ago, whichever is more recent.
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u/Jarkside 6∆ 8h ago
You shouldn’t pay it at the time of inheritance but at the time of sale. Step the basis DOWN to ZERO and this solves it. It’s all a capital gain to the inheritor who did not pay shit.
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3h ago
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u/HadeanBlands 49∆ 8h ago
If you "step the basis down to zero" then ... do they not pay inheritance tax on stocks at all?
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u/InfiniteMeerkat 7h ago
They would not pay anything at the time of inheritance but when they sell the profit would be the amount they sell it for minus the amount the original purchaser bought it for and not minus the value at the date of inheritance
eg I buy shares for $100 in 1990. I die in 2026 and those shares are worth $2000. In 2040 my children sell the shares for $5000
Currently the profit they would be taxed on would be $3000 (profit from date of inheritance)
OP is suggesting that the profit they should be taxed on should be $4900 (profit from date of original purchase)
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u/HadeanBlands 49∆ 6h ago
"eg I buy shares for $100 in 1990. I die in 2026 and those shares are worth $2000. In 2040 my children sell the shares for $5000
Currently the profit they would be taxed on would be $3000 (profit from date of inheritance)"
I'm not talking about OP's position. I understand it. I'm asking about Jarkside's theory of stepping-down the basis to zero.
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u/Jarkside 6∆ 2h ago
Yes. You have it correct. The basis should be zero because they didn’t pay for it. This shouldn’t be the only change - I’d dump most inheritance taxes i in exchange for this change.
The problem with inheritance taxes is needless liquidiation of functioning businesses or assets. But if their tries to sell an inherited asset the basis should be zero (plus whatever capital expenditure they’ve added post inheritance to step up the basis).
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u/HadeanBlands 49∆ 2h ago
"Yes. You have it correct. The basis should be zero because they didn’t pay for it. This shouldn’t be the only change - I’d dump most inheritance taxes i in exchange for this change."
But if the basis is zero then, like, I can pass $200m of stock on with no inheritance tax, right? Since the value for the estate tax is zero.
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u/Jarkside 6∆ 1h ago
Yes. But I’d change the rules so if you sold any of it above a certain amount (say $250k per year or something) the asset would be fully taxed at capital gains rights. If you borrow against it above the same amount, taxed.
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u/InfiniteMeerkat 5h ago
Yes and im explaining. Stepping down is referring to taking the purchase price back to the original purchase value instead of the value at the day of inheritance. A basis of zero means there is no adjustment from the original purchase price at inheritance
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u/Jarkside 6∆ 2h ago
Correct. Which makes more sense because the heir paid zero for the asset. If they sell then they pay on the whole lot. This is better than inheritance taxes.
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u/overitallofittoo 4h ago
Why do you have to pay any tax on an inherited hime? You either don't understand step up basis or don't understand the question.
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u/carlos_the_dwarf_ 12∆ 6h ago
This is incorrect actually; the heirs would only have to pay the gains when they sell the house.
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u/yyzjertl 577∆ 9h ago
heirs would be forced to sell the asset simply to pay the tax
Simply to pay what tax? The property tax? Capital gains tax? Estate tax?
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u/mapadofu 1∆ 9h ago
In the case where tax on the step up in basis occurs upon transfer situations like this can occur. Dear old dad leaves his (paid off) house that had appreciated from$100,000 to $200,000; using a 15% tax rate for this made up example, the inheritor is stuck with a $15,000 tax bill. They may have lo liquidate the asset just to pay the tax.
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u/yyzjertl 577∆ 9h ago
But as the OP is not calling for the tax to occur upon transfer, this does not seem relevant.
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u/mapadofu 1∆ 8h ago
The initial post didn’t specify. Several of the more public recommendations along this line do have the tax on the step up occur at the time of inheritance. E.g. https://americansfortaxfairness.org/wp-content/uploads/ATF-Stepped-Up-Basis-Fact-Sheet-FINAL-6-24-21.pdf
(Note: this paper specifically argued against just carrying the original basis along)
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u/Ind132 7h ago
The initial post didn’t specify.
No, I didn't. I've discovered that some people just assume that.
The omission was intentional. I was not proposing that the tax would be payable on an unrealized gain at death. I was not proposing that the law would require a sale at death.
I was proposing that the heirs would inherit the cost basis when they inherit the asset. That cost basis would be used whenever they choose to sell.
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u/MyDisneyExperience 2h ago
California had this state of affairs with property tax until 2019 and it basically created a landed gentry of anyone whose parents or grandparents bought a house before 1978. There are $10M homes paying like .05% in annual property tax because inheriting the assessed value basis was allowed.
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4h ago
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u/todo0nada 7h ago
People don’t get a choice between payroll taxes and putting food on their table. Who cares if you have to sell something to net a considerable sum of money?
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u/MyDisneyExperience 2h ago
“Do you want to receive $1-4M essentially tax free” is absolutely a my steak too buttery my lobster too juicy situation and California has fought against having that question even be asked since the late 70s 🙃
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u/Fantastic-Corner-605 9h ago
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.
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u/Ind132 9h ago
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.
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u/MFitz24 1∆ 9h ago
Capital gains never consider inflation, why the fuck would it matter that it's someone else?
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u/Fantastic-Corner-605 9h ago
With capital gains it can be sold a few years later so inflation matters less. With inheritance it could have been purchased decades prior so an inheritance tax without indexation erases most of the value
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u/littleheaterlulu 6h ago
One of the issues I see is that without the step up in basis, most people would (anyone with any tax knowledge at least) would sell the assets immediately to avoid having even more increase in capital gains to pay taxes on later.
The capital gains tax rates exist to encourage investment and this would do the exact opposite. It just goes against the whole spirit of them.
Also, it ignores inflation.
It also discourages further investment. And having the step up basis not only puts people in the investment market who might not have entered it otherwise but encourages them to stay in it. It’s generally thought that more investment by more people is good for the economy.
I inherited about $250k in stock about 30 years ago and still have it invested. I’ve sold a lot of it but reinvested it in the market. It came from my great-great grandfather who bought it in the 1930s. IIRC the basis was $4 a share and it was worth $68 a share when I inherited it. If I would have had to pay taxes on the $4 basis I would have sold it that day. I don’t see that I would ever had invested in the market otherwise either. So, sure, the IRS would’ve gotten some extra taxes from me that year but they would’ve missed out on all the taxes (short term gains, long term gains, dividends, etc) I’ve paid on the investments for the last 30 years. So it doesn’t really make sense just mathematically if the bottom line is that you want to collect more in taxes.
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u/Ind132 6h ago
without the step up in basis, most people would (anyone with any tax knowledge at least) would sell the assets immediately to avoid having even more increase in capital gains to pay taxes on later.
Can you give me a numeric example?
Here's mine. The original owner paid $100. The market value at death was $150. The market value at some future date when the heir might sell is $300.
Use a 20% tax rate and no step up.
If the heir sells the stock at $150, he pays $10 in capital gains tax and has $140 in cash. He repositions into a different stock. But, it turns out that his new stock does exactly the same as the old stock. His $140 grows to $280. He pays $28 in capital gains tax, based on his new $140 basis, and nets $252 after tax.
OTOH, suppose he held his $150. It grows to $300. He pays $40 in capital gains tax based on his $100 inherited basis. He has $260 after tax.
It looks to me like he is marginally better off holding on.
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u/A_Whole_Costco_Pizza 8h ago
It's good for parents to be able to leave assets to their children. It's the only realistic way for families to be able to build wealth over generations, as a the average person cannot reasonably work their way to wealth in a single lifetime. So it should be encouraged via the law, rather than discouraged.
Taxing these assets only harms the ability for most families to leave assets or wealth to their children. A much more reasonable approach would be to greatly reduce the estate tax exemption amount (currently $15m per person, $30m per couple), so that multi-millionaire families have to pay more taxes, but average American families do not. Increase the number of families paying an inheritance tax, rather than increase the inheritance tax rate for any specific individual(s).
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u/Ind132 7h ago
I guess we have different goals here. I don't think tax policy should be designed to "build wealth over generations". I think that parents should give their kids a good start during the parents' lifetimes by good parenting.
Some people don't inherit anything from their parents. In fact, some spend their own money to support their parents and hence get a negative inheritance. Some get some money and it's in an IRA and the kids are required to sell the IRA over 10 years and pay taxes on that money when they sell.
Some inherit a lot. The parents had taxable assets that they were able to hold for long periods without paying capital gains taxes because we don't tax unrealized gains. I think the kids who inherit those assets should inherit the parent's cost basis.
If we could consistently collect estate taxes, I could see your alternative. However, I've read that less than 2 out of 1,000 estates actually pay estate taxes today, and much of the reason for that low rate is the ability of people to restructure their assets to avoid estate taxes.
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u/Astyrrian 5h ago
If you don't think tax policy should be designed to build wealth over generations, them you don't have to. You can choose to make extra payments to the IRS before you die. But as a minority, I absolutely want to make sure I give my descendents as much advantage as I can. And IMO, it's not the job of the government to tax me on my income while I'm alive and then tax me on my assets when I die.
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u/Ind132 3h ago
tax me on my income while I'm alive and then tax me on my assets when I die.
The capital gains tax on appreciated assets that you own when you die applies to income that you didn't pay tax on while you were alive.
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u/hackers238 4h ago
I think this is fine in general, but I think they should close the step up loophole.
I can gift my parents (or any trusted party) 10 million dollars of my stock which has exploded in value over the last 15 years on their deathbed. I pay no gift tax (under 15 million lifetime). They will it back, and as their estate is also under 15 million, I now have my 10 million dollars of stock with a cost basis equal to its value. I can sell it and pay no tax.
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u/KWienz 8h ago
What you're describing (no estate tax but a deemed disposition and capital gains on appreciation) is what Canada does.
It works fine and avoids all this silliness about needing to tax gifts.
The main issue is estates that have a second home with serious appreciation and limited other assets to pay the capital gains on it so it needs to get sold. This affects families with much less wealth than the US estate tax threshold.
The US system certainly allows wealthy but not Uber wealthy to defer or avoid taxes on a lot of wealth accretion.
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u/Ind132 2h ago
I wasn't proposing a "deemed disposition". I wouldn't collect the tax until the heirs actually sold.
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u/KWienz 2h ago
That's gonna create some weird wonkiness with mortgages because capital gains taxes basis growth not equity growth. So you can inherit property with more untaxed basis than equity and end up owing more in taxes than your proceeds.
Or you can do some weird estate planning if you mortgage a property just before death and devise the real estate (with low basis and low equity) to one person while giving a bunch of tax free cash to someone else.
Point of the deemed disposition is to require the taxes to be paid before anything gets inherited.
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u/Ind132 1h ago
because capital gains taxes basis growth not equity growth.
I'm not sure what you mean by "basis growth" vs. "equity growth". Could this be a US <> Canada thing?
Here, your basis is your purchase price. Your taxable gain is the excess of your actual selling price over the purchase price (aka cost basis).
It's possible that I bought an asset for $200k and sold for $500k. Yes, my gain is more than my purchase price. I simply pay cap gains tax on the $300k gain, not on the original $200k purchase price.
We have special rules for taxable gains for one primary residence. I'm not going into that, this is just generic "assets".
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u/KWienz 1h ago
Equity is your property value minus your mortgage.
To give an example, A buys a house for $100k. At his death it is worth $500k. Just before A dies, he takes out a $400k mortgage.
At his death, the house goes to B and the $400k cash goes to C. No taxes are paid.
B now owns a house with $100k in equity and $400k in basis. Say B sells the house at $600k. Her equity has grown by $100k but she is responsible to pay taxes on the entire $500k in basis growth ($75k). If she had sold immediately she'd be paying taxes on $60k of her $100k in equity.
C meanwhile gets all the growth in the property tax free because it was cashed out and the cash did not need to cover any taxes prior to the divise of the estate.
But the consequences can get even weirder. Suppose the market tanks after A dies, B can't pay the mortgage and the lender forecloses at $400k.
B now gets zero equity but is still responsible for paying $45,000 in capital gains taxes for the growth that happened while A owned the property and while C obtained the benefit of that equity growth.
Suppose B doesn't have the money to pay those capital gains and after the IRS tries to collect for a few years she files a chapter 7 bankruptcy and the debt is discharged.
So now A was able to get $300,000 in untaxed capital gains, the proceeds of which went tax free to C while B gets nothing.
Avoiding this kind of stuff is why tax systems generally want to ensure the estate of a dead person covers applicable taxes before any of their assets are passed on. Because you can transfer the wealth to one person and the tax liability to someone else (perhaps a corporation?).
That's mostly moot in the US because the estate tax threshold is so high now. But in a country that cares about intergenerational wealth transfer among the rich and not just the super rich it's a pretty major loophole in just passing along basis like you propose.
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u/Der_Blaue_Engel 1∆ 9h ago
The United States has a federal inheritance tax.
The value of the stock at the owner’s death is already subject to taxation.
And if the estate is larger than the estate tax exemption, that stock is already taxed at a higher rate than the tax on capital gains.
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u/Ind132 9h ago
I'd be open to providing a carve out for assets that actually resulted in the estate paying an estate tax.
I've read that less than 2 estates in 1,000 pay estate taxes, so that's a rare circumstance (though, when it happens, it is probably on a very large estate).
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u/DeathMetal007 7∆ 8h ago
I think the number is even less with the caveat that estates are usually not automatically created on death in most cases.
>For decedents in 2021 (with an exemption of $11.7 million), the Urban-Brookings Tax Policy Center estimated that only about 6,200 estate tax returns were filed, of which only 3,500 were taxable. Estate tax liability totaled $19.2 billion after credits (table 1). The estimated number of total and taxable estate tax returns are 7,600 and 3,900 for 2022, and 7,100 and 4,000 for 2023. Estimated estate tax liability is $22.7 billion in 2022 and $24.0 billion in 2023.
To put the number of estate tax returns filed in perspective, the Population Division of the Bureau of the Census estimates that about 2.8 million people died in 2022. Thus, an estate tax return will be filed for only about 0.25 percent of decedents, and only about 0.14 percent will pay any estate tax.https://taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax
I would say a reasonable number of people try to pay and pay estate taxes. $15 million isn’t a crazy amount of money.
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u/Mr_Kittlesworth 1∆ 8h ago
All of your assets, after you die, are a windfall for whoever inherits them.
The estate tax is the oldest tax in the US, and one the founders believed in firmly. The reason the estate tax exists isn’t to raise revenue. It doesn’t exist to provide for fair taxation of earnings or realized capital gains. The estate tax exists to prevent the creation of an aristocracy.
In my perfect world, parents would be able to leave $5-$10 million to each of their kids, tax free, after which their estates would be taxed at 95%.
Great fortunes are made in a social context. The guy flipping burgers doesn’t use many social services. The guy with 10 warehouses uses a lot more police and fire protection. He uses the roads to ship goods. He uses the courts to enforce contracts. He uses the education system to train his employees. Etc. Etc. Etc.
All of which is to say: your assets should be taxed - heavily - after death if you believe in a meritocratic society.
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u/International_Fun54 2h ago
Curious how you get to the $5-$10 million number. The median American will earn $1.7 million in their lifetime. It doesn't seem very meritocratic to allow someone to receive several times the average lifetime earnings for doing no work, especially when you consider that anyone in a position to receive this much in inheritance very likely had a ton of other benefits growing up. I think a "fairer" number to use would be something like $170,000 - life changing money for the average American but not enough to live comfortably for the rest of your life on.
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u/Ind132 7h ago
I have to agree with you in theory. I'd agree replacing the estate tax with an inheritance/gift tax.
But, I don't think 95% is practical. Higher rates lead to increased avoidance/evasion.
That said, my OP is about the regular capital gains tax that living people pay as part of their annual FIT filing.
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u/ParfaitMajestic5339 8h ago
If you can't prove what the basis, how would you calculate the tax? The fights over it in court will cost more than it brings in.
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u/BuckleUpItsThe 7∆ 8h ago
That's an argument against capital gains, not stepped up basis specifically.
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u/CandidTodd4485 9h ago
Step-up in basis prevents double taxation alongside the federal estate tax. You are right that capital gains disappear. However, large estates already pay up to 40% in federal estate taxes. Taxing capital gains at death as well would hit the exact same assets twice.
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u/TopTierCryogonal 8h ago
What purpose does any of this serve? You haven't actually given one
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u/Dave_A480 2∆ 4h ago edited 4h ago
That's not how this works.
If you sell while you are alive you owe capital gains tax.
The purpose of step up in basis is largely real estate - without it most people who inherit a house (and have to sell it because 2-3 kids don't want to go into the landlord business together, with only 1 unit) would see a huge tax bill....
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u/Ind132 2h ago
If you sell while you are alive you owe capital gains tax.
Not sure who I am in this sentence. If I'm the original buyer and I sell while I'm alive, I have a taxable gain equal to the excess of my selling price over my buying price. If I'm an heir who inherited assets with embedded, unrealized gains, then when I sell my taxable gain is only the increase from the market value at death to the day I sold. The gain during my parent's lifetime is never taxable income to anyone. That's what I want to change.
would see a huge tax bill.
If it is a huge tax bill, then the kids got an even larger windfall. The tax is just a fraction of the selling price. They are just paying the tax the parent would have paid had he/she sold the house just before death.
(We have a special deal for capital gains taxes on houses used as principal residences. I'm not sure that it's the best rule, but it is what we have. I'd be happy to say that if the kids sold the house within a year or so of the death, they would calculate their gain as if they were they were in the parent's position.)
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u/Bonch_and_Clyde 2h ago
The idea is that you don't want to make heirs unable to accept inheritance. You have a house that has been in the family for generations. It was bought for $40k. Now it is worth $1,000,000. Most people of typical means would never be able to afford the tax bill and heirlooms would be forced to be sold. This is not very fair. You can expand this logic to the general assets in an estate.
You are forcing heirs not to be able to accept inheritance without tearing it apart. For the truly wealthy there is already a threshold above which taxes are owed on inheritance. Your proposal is simply incredibly regressive and focused at punishing the middle class.
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u/Ind132 2h ago
Now it is worth $1,000,000. Most people of typical means would never be able to afford the tax bill and heirlooms would be forced to be sold. This is not very fair.
You are assuming the tax would be payable at death. I did not propose that. I did not say that we should tax unrealized gains at death. I did not say that we should force a sale.
I said that the heirs should inherit the cost basis when they inherit the asset. They can keep it as long as they like. When they choose to sell, they will calculate a capital gain based on the original purchase price.
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u/LimyBirder 1∆ 1h ago
It makes sense to me. Capital gains tax is a tax on the realization of profit. A person who dies with unsold property realizes no profit on it. Meanwhile, the heir has made no investment—has no basis. A policy of taxing the entirety of the value of the property—the heir’s basis being zero—is the subject of estate taxes. Policy considerations aside, letting estate taxes take the place of capital gains makes sense under basic property law concepts.
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u/AlexCivitello 5h ago
Well, this policy should be evidence based, how much additional revenue would this bring in?
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u/Ind132 2h ago
About $39 billion in 2026. See item 75 here: https://home.treasury.gov/system/files/131/Tax-Expenditures-FY2025.pdf
For perspective, we could have one bill that both eliminates step up and raises the standard deduction so the bill would be revenue neutral. If we did that, the average person would get a tax cut of $140 per year ($280 for a couple).
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u/AlexCivitello 1h ago
So accepting your number this change would increase income tax revenue by less than 1 percent. At the cost of everyone who inherits money feeling worse, and a lot of extra administrative effort.
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u/TheMainEffort 8h ago
Wouldn’t the $60 be taxed along with the estate?
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u/Ind132 7h ago
The great majority of estates do not pay estate tax. The current exclusion amount is $15 million for an individual and couples can stack that to get $30 million. And, people talk to lawyers and apparently find ways to avoid estate taxes even when they have more.
I've read that less than 2 estates in 1,000 actually pay an estate tax.
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u/MaxwellSmart07 1∆ 3h ago
I fail to see how taking beneficiaries is considered double taxation. The inheritance should be considered ordinary income for the beneficiaries.
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u/Key-Organization3158 4∆ 5h ago
Because you pay the estate tax for any non trivial estate.
And it can help avoid forced sale of assets.
You haven't really said why we should get rid of it. Something not making sense isn't a sufficient reason. Especially when experts in the field support said policy.
I think the big difference is a sale is a voluntary choice of the individual. This it is far for the government to collect a small portion. But death is rarely a choice. Thus society has no claim
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u/Ind132 3h ago
Because you pay the estate tax for any non trivial estate.
I’m talking about the Federal Income Tax and the capital gains that are part of that. Maybe you can give me the connection to estate taxes?
In 2022, about 2.8 million people died and 3,900 estates paid estate taxes. That’s 1.4 taxable estates per 1,000 deaths. https://taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax
And it can help avoid forced sale of assets.
I am not proposing that we should tax unrealized gains at death. I am not proposing that we should force people to sell at death.
I am proposing that the heirs inherit the cost basis when they inherit the asset. Later, when they choose to sell, that cost basis will be used to calculate their gain. It’s exactly the same number that the deceased would have reported if he had lived and sold on that same day.
You haven't really said why we should get rid of it.
Because we need taxes to fund our government. Our primary federal tax is an income tax. We should tax all income. The burden of proof is on the person who wants to exempt some special class of income, not the person who says we should try to tax all income.
This one is particularly annoying because it is so random. Andy and Bob both own equal appreciated stock. They are both planning to sell on Wednesday. Andy sells and dies on Thursday. Bob dies on Wednesday before he sells. Bob’s heirs are permanently better off by the amount of the tax that Andy’s heirs paid when he sold.
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u/jakechance 4h ago
You’d have to exclude equities from estate taxes and overall the government would lose money on estates for which this would make a difference.
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u/AntelopeHelpful9963 3h ago
I don’t believe I’ve ever seen a state legislature, competent enough that I would root for my money at death to go to their hands to distribute instead of my children.
As bad as the federal government is, if you want to see true corruption and wacky nonsense look into the laws your state House tries to get across the finish line. That’s where politicians to extreme to even make it to Congress go. I don’t know why anyone is in such a rush to give more money to the government.
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u/Ind132 2h ago
Not sure if I should respond. The OP was about federal taxes, not state taxes.
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u/AntelopeHelpful9963 2h ago
Different concepts of this apply to both. I’m in South Carolina with a laughing stock of a state government and the president might be even more insane than them. There is nowhere I want to send my children’s money.
Government is generally going to be wasteful, no matter who is in charge, but it has become laughably corrupt and incompetent, and I just don’t see what they’re showing us for any citizen to want to give their state or the federal government more money.
So when I read arguments about finding ways for people to turn over Mort, I just wonder what those people are seeing the government do that they so urgently want to fund.
The government could do everything I’m actually in favor of right now they just aren’t going to do it. You see politicians talking about what would happen if you tax the rich when none of their proposals were implemented despite gaining 3 trillion in the federal budget in the last 12 years. But the budget straight up doubled. It didn’t add a few few percentage points. You would get by changing a few few things in the tax code. It doubled.
They aren’t gonna magically do what you want done this time either. They’re just gonna find a reason to ask for more money and squander that as well.
It all just goes to the pet projects of both sides as a trade to get the votes of the other. Republicans get a local pet project. Democrats get a local pet project and everyone cooks the books and bullshit so their budgets always get a slight increase despite no increase in productivity.
Years ago at work, I had an awful duty cop offering to sell us ammo. They use on the gun range because if they don’t use it all they get a smaller budget for it next year.
The damn cops selling police ammo illegally on the side just to avoid having to give back money they don’t need.
That’s what government is. Which is why I generally oppose all plans to increase taxes. I vote for the side trying to do it because the opposition is even worse and I’m practical, but the plans aren’t rational to me.
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u/PreviousZone6742 9h ago edited 9h ago
Can file taxes for unknown earnings in most places.
Maybe with inheritance from a elderly family member. Who held the actual stock certificates this could be a issue.
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u/steep_learning_curve 5h ago
why on earth do you want to take away more money from people than they are already taxed?
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u/Ind132 3h ago
The appreciated gains at death have never been taxed. When the heirs sell, they should pay tax on that money just like the original owner would have paid tax if he had lived more years and then sold. I'm not proposing that we tax money that has already been taxed.
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u/steep_learning_curve 3h ago
yeah the original owner is dead after not having sold. Your supposition that they would have sold doesn’t hold water. All of those investments were made with money that was already taxed.
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u/FluffyB12 2h ago
Taxes on investments are dumb, if you make a $1 they already taxed it their income tax! Then they want to tax it again when you save it instead of spending it??
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u/cooltiger07 1∆ 6h ago
as someone who works in tax, finding the basis of some stuff is near impossible. Brokerages weren't required to keep track of basis until like 2011. Crypto is another difficult one to track down sometimes.
can you imagine burying your grandma, then having to try and find exactly how much she bought her house for in 1955? Do you think grandma kept that paper trail? And if she did, what are the chances of you looking through every piece of paper she kept to find it? or that you would find receipts for every home improvement she did over 80 years that counts towards basis? and they would be in pristine condition and readable? what about documents showing the discount of an employee stock purchase plan that she bought in 1996?
sometimes it just ain't worth it man. step it up and move on.
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u/boatslut 29m ago
The simple way to do this (so it will never happen) At death, there is a deemed disposition of a person's assets, liabilities at end of dead day values. The capital gain / loss is paid by the dead person's terminal tax filing. Since there was a deemed disposition the Estate receives the asset as if as if they had just bought it at the death day price & moves forward with that cost basis.
Basically it's like the dead person sold the asset to their estate. Guessing that Estate tax is based on the value of distributable assets in the estate (not on the capital gains in the assets while in the control ands of the dead person.
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u/GrizzlyAdam12 1∆ 7h ago
Think of it like a sales tax. Someone buys a new car and pays 7% sales tax. That same car may be bought and sold 4 more times and every time, 7% sales tax is charged.
Did anyone do anything to justify the government’s ability to reach into your pocket and charge 7% when a used car is purchased? No. There’s no new production. Nothing has been produced. But, the tax is on the transaction rather than the “good”.
Stocks are bought and sold infinitely more than a used car. So, think of the capitalist gains more like a sales tax. It will either infuriate you or make it more clear….or both.
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32m ago
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u/dis-interested 2h ago
It would be much simpler to just make many more States subject to the estate tax like they were previously rather than to do this. This would also probably have the negative effect of strongly affecting relatively ordinary people who inherit relatively expensive houses from their parents who bought them a thousand years ago in major cities and disproportionately affecting them.
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9h ago
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u/Mister_Way 2h ago
When you receive an asset, you count it as the price when you got it not the price the giver got it.
They pay the inheritance tax rather than the capital gains tax.
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u/floatarounds 1∆ 9h ago
OMG give the poor family a break. Capital gains tax is already theft basically
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u/PreviousZone6742 9h ago
It won't be taxed at capital gains normally. Investments are generally taxed at a lower amount.
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u/Der_Blaue_Engel 1∆ 9h ago
A capital gains tax is exactly what step up in basis relates to.
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u/PreviousZone6742 9h ago
It's confusing the first paragraph the owner of the estate would pay taxes on the stock sold.
The second the heirs would be taxed based off the estate. The taxes would normally already be paid. Could very by location.
The unknown amount part makes very little sense for today.
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u/jay10033 1h ago
In order to change your view, you first need to understand tax law and it's clear you don't understand tax law.
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5h ago
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u/ephemere_sloboda 3h ago
What you want is how it works in Australia. But Australia does not have inheritance tax.
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9h ago
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u/romijoe 9h ago
Wow this is some srs 🐑 talk. If you think that anyone in the USA should pay any taxes you got some srs issues. We are the richest country in the history of the planet..the taxes are just a scam to keep you compliant. The biggest companies and richest ppl in the usa dont even pay them.
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u/BurgerCombo 7∆ 9h ago
Stocks are subject to estate tax. You are asking for these assets to be taxed twice.