Thursday, August 8, 2019
A group of 21 Republican members of the US Senate have signed a letter to the Treasury Secretary urging him to amend how capital gains tax liability is calculated.
In the letter, they highlight that taxpayers can be liable to tax even where they have made a loss, because the price at which a security is bought for is not adjusted for inflation when capital gains tax liability is calculated.
"When a taxpayer sells a capital asset, they pay taxes on their gains - the difference between the basis and the sales price," they observe in the letter. "Under current rules, the Treasury determines the basis by looking at the sticker price at the time of the purchase without consideration of the inflation-adjusted cost of the assets in today's terms."
"This means, in some cases, a taxpayer can face a tax liability even after suffering an actual loss," they say.
To illustrate the problem, the senators said, by way of an example, if a taxpayer to were to have bought one share in 1998 for USD32.38, and sold the stock in 2019 for USD48.13, they would be deemed to have a nominal gain of USD15.76 and would be taxed USD3.75. However, if the purchase price is adjusted for inflation, the same share's purchase price would be valued at USD50.50 in today's dollars, which would result in the determination of a loss of USD2.37.
Under the current system, the shareholder would be liable to tax of USD3.75 despite incurring a loss in real terms, they argue.
"Even when a taxpayer experiences a real gain, the effective capital gains tax rate can easily double the statutory rate passed by Congress," the letter states.
"This treatment punishes the taxpayer for the mere existence of inflation and is inherently unfair," the senators say. "Other tax provisions such as individual income tax brackets are rightly adjusted for inflation annually. Capital gains ought to receive the same equitable treatment."