A coalition of conservative groups and Republican lawmakers is pressing the Treasury Department to unilaterally index capital gains for inflation, a move proponents call a fair tax cut, but which opponents decry as an illegal executive action that would disproportionately benefit the wealthy and add hundreds of billions of dollars to the national debt.
Indexing Proponents argue that taxing gains resulting purely from inflation is unfair. Under current law, when an asset is sold, the capital gain is calculated based on the difference between the sale price and the original purchase price, or “cost basis.” Indexing would adjust this cost basis for inflation, meaning taxes would only be levied on the “real” gain in value.
In a February 19 letter, a group of organizations led by Americans for Tax Reform argued that the Treasury Department has existing authority to redefine cost basis. “Rather than having to pay tax on both real and inflationary gains, a family or business selling an asset would only pay tax on the real gain,” the letter stated. The groups framed the move as a way to unlock “hundreds of billions of dollars in unlocked investments.”
House Republicans from the Real Estate Caucus echoed this call in a March 5 letter to the Treasury Secretary, framing it as essential relief for homeowners. “Taxing these phantom gains can discourage housing mobility, lock up housing supply, penalize long-term homeowners, and distort real estate investment decisions,” they wrote.
The legislative component of the push is Senator Ted Cruz’s (R-TX) Capital Gains Inflation Relief Act of 2025. The bill (S. 798) proposes to allow individual taxpayers, but not corporations, to adjust the cost basis of certain assets for inflation if they have been held for more than three years. The bill defines these “indexed assets” to include common stock, tangible property, and digital assets. Under the proposal, the inflation adjustment would be calculated using the gross domestic product (GDP) price deflator.
“This commonsense legislation updates our tax code to ensure that hardworking Americans are not unfairly penalized for inflation,” said Senator Thom Tillis (R-NC), who cosponsored the bill.
Pushback
In a recent analysis by Urban-Brookings Tax Policy Center Co-Director Elena Patel notes that the George H.W. Bush administration considered and abandoned a similar effort in 1992. The administration backed down after its own Department of Justice (DOJ), White House counsel and Treasury concluded it lacked the unilateral authority. Then-Attorney General William Barr stated the legal question was “clear” and that he “didn’t think that a reasonable argument could be made to support that position,” Patel observed.
The legal ground for executive action may have weakened further since the 1990s. Patel argues that the Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo, which overturned the Chevron doctrine, makes unilateral agency action riskier. That doctrine had required courts to defer to an agency’s reasonable interpretation of ambiguous laws. Without that deference, “Treasury regulations are now more vulnerable to court challenges, not less,” as judges may now decide the questions for themselves.
In 2019, when urged by Cruz to take similar action, then-Treasury Secretary Steven Mnuchin deferred to Congress rather than acting unilaterally.
Regarding the Loper Bright factor of the equation, Patel told Checkpoint that “[w]e’re actually in a whole new era right now in terms of how the judicial branch will or will not defer to agency expertise in the implementation of rules.” She reasoned that if the proposed amendment to the definition of cost basis is on “weak legal footing … then I would expect that to end up in the courts pretty quickly.”
Fiscal Impact The proposal’s fiscal and distributional consequences are central to the debate. The Committee for a Responsible Federal Budget estimates that indexing capital gains could reduce federal revenue by $170 billion to $950 billion through 2035, depending on how it is implemented. “The last thing we need is more deficit-financed tax cuts – especially ones enacted by executive fiat,” said Maya MacGuineas, president of the committee.
Analyses suggest the benefits would flow primarily to high-income households. A 2018 report by the Penn Wharton Budget Model of a nearly identical proposal found that over 86% of the tax cut would go to the top 1% of earners, with 63.1% going to the top 0.1%.
While proponents highlight the benefit for homeowners, critics note that most would not be affected. Current law already allows homeowners to exclude up to $250,000 (for single filers) or $500,000 (for joint filers) in capital gains from the sale of a primary residence. According to a Brookings analysis, an estimated 95% of households would owe no federal capital gains tax on a home sale under current law, making the proposed indexing change irrelevant for them.
A Decades-Old Idea The debate over indexing capital gains is far from new, gaining prominence during the high-inflation era of the 1970s. Research published by the Tax Foundation in 2018 illustrates the core argument with an example: an investor who bought $100 of stock in 1965 and sold it for $110 in 1981 had a $10 nominal gain. However, due to high inflation, the original $100 had the same purchasing power as $286 in 1981. The investor suffered a real loss of $176 but was still taxed on the $10 “phantom gain.”
However, critics like Patel respond that a consistent approach would require indexing the entire tax system, not just capital gains. This would include indexing interest income and, crucially, deductions for interest expenses. “When you fully talk about what it means to index gain for inflation, you also have to talk about indexing debt, because that’s just the reverse side of the ledger from an asset, and I think you would be hard pressed to find anybody who would be in support of indexing debt for inflation,” Patel said.
She found the idea to not so much be “about loosening capital gains taxation so much as … writing a policy that I think very clearly benefits a very small part of the population.”
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