Change the Tax Treatment of Capital Gains From Sales of Inherited Assets

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Revenues 1.2 4.8 7.0 9.0 11.3 12.8 14.1 15.1 16.5 18.4 33.3 110.3

Data source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2021.

When people sell an asset for more than the price for which they obtained it, they realize a net capital gain. The net gain is typically calculated as the sale price minus the asset’s adjusted basis—generally the original purchase price adjusted for improvements or depreciation. To calculate the gains on inherited assets, taxpayers generally use the asset’s fair-market value at the time of the owner’s death, often referred to as stepped-up basis, instead of the adjusted basis derived from the asset’s value when the decedent initially acquired it. When the heir sells the asset, capital gains taxes are assessed only on the change in the asset’s value relative to the stepped-up basis. As a result, any appreciation in value that occurred while the decedent owned the asset is not included in taxable income and therefore is not subject to the capital gains tax.

Under this option, taxpayers would generally adopt the adjusted basis of the decedent (known as carryover basis) on assets they inherit. As a result, the decedent’s unrealized capital gain would be taxed at the heirs’ tax rate when they eventually sell the assets. (This option would adjust the basis of some bequeathed assets that would be subject to both the estate tax and the capital gains tax. That adjustment would minimize the extent to which the asset’s appreciation in value would be subject to both taxes.)