Tax Reform: Down with the “Stepped-Up Basis”

by Gerald E. Scorse / November 2nd, 2018

The term “stepped-up basis” is shorthand for a tax loophole that lines the pockets of the haves while it picks the pockets of the Treasury. According to the Congressional Budget Office, the cost over ten years could reach $644 billion.

Let’s see how the well-off get handed hundreds of billions that should be going toward the good of all Americans.

The basis of an asset (stocks, real estate, fine art, etc.) is its price or fair market value when it’s acquired. Any increase over the basis becomes a capital gain. When holders dispose of assets, they’re taxed on those gains—except when the stepped-up basis steps in, and erases both the gains and the taxes.

It’s automatic: when assets are passed along to an heir, the value at the time of the transfer becomes the heir’s basis. Magically, all the accumulated gains vanish. With no gains, all the taxes vanish too.

The basis loophole is actually one tax inequity on top of another. First, capital gains are taxed at a far lower rate than wages. When this preferential rate isn’t preferential enough, the affluent simply hold on for the zero rate.  (“This is the thrill that pulses through the veins of the well-to-do when they discover there is no longer any limit on their power to accumulate.” The words are Thomas Frank’s, taken from his latest book Rendezvous with Oblivion.

The loophole doesn’t apply to commonly-held retirement accounts such as regular IRAs…

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