Trump's New Capital Gains Proposal Could Change How Much Tax You Owe on Stock Profits

President Donald Trump is drawing fresh attention to a proposal that could lower the tax bill for Americans who sell investments that have increased in value over many years, a change that could matter for anyone looking to start investing with a long-term plan.

On August 28, Trump amplified a proposal to index capital gains for inflation on Truth Social, potentially reducing the taxable profit on long-held stocks and other appreciated assets.

Trump highlighted the capital gains idea again

The post Trump shared argued that investors should pay capital gains tax on their inflation-adjusted profit rather than the entire nominal increase in an investment's value. Under that approach, investors could increase what they originally paid for an asset to reflect inflation before calculating the taxable gain.

Trump had already shown interest in the idea earlier in August. His economic adviser Kevin Hassett confirmed that the administration was considering additional tax proposals, while the former National Economic Council Director Larry Kudlow said he had spoken with Trump about capital gains indexing and that the president "liked the idea of the indexing."

Trump's August 28 post does not mean the tax code has changed, however. No indexing policy has been enacted, and important questions remain over which assets would qualify and whether existing investments would be covered.

Inflation currently counts toward your taxable gain

Under current law, an investment's cost basis generally starts with what you paid for it, subject to certain adjustments. When the asset is sold, the taxable gain is usually the difference between the sale proceeds and that adjusted basis.

Inflation is not separately stripped out of that calculation. If $100,000 of stock grows to $200,000, the nominal gain is generally $100,000 even though some of that increase may simply reflect the decline in the dollar's purchasing power.

Capital gains indexing would instead raise the original basis to reflect inflation, reducing the portion of the appreciation treated as taxable profit.

A $100,000 stock investment shows how it could work

Trump's reposted example becomes more meaningful once the tax bill is added. With a $100,000 nominal gain, a 15% long-term capital gains rate would produce about $15,000 in federal tax. If 20% cumulative inflation increased the cost basis to $120,000, the taxable gain would fall to $80,000 and the tax to roughly $12,000, saving about $3,000.

At the 20% long-term capital gains rate, the same adjustment would reduce the tax from $20,000 to $16,000, a savings of about $4,000.

Actual results would depend on income, filing status, other gains and losses, basis adjustments, and whether the 3.8% Net Investment Income Tax applies.

Long-term investors could have more to gain

The longer an investment is held, the more inflation can accumulate and potentially increase the indexed cost basis.

Yale's Budget Lab estimates that roughly half of realized capital gains come from assets held longer than five years, about one-third from assets held more than 10 years, and around 15% from assets held more than 20 years.

That could make the proposal particularly relevant to investors sitting on stocks or other taxable assets that have appreciated over decades.

A large return would not automatically produce the biggest relative benefit, though, because indexing only removes the portion of the gain attributable to inflation.

Your 401(k) probably wouldn't get the same benefit

The proposal would be much more relevant to investments held in taxable brokerage accounts than stocks held inside tax-advantaged retirement accounts.

Tax-advantaged retirement accounts work differently because gains inside traditional 401(k)s and IRAs generally are not subject to capital gains tax when investments are sold inside the account, while qualified Roth withdrawals are generally tax-free.

Someone whose investments are primarily inside retirement accounts may therefore receive little or no direct benefit from capital gains indexing, while investors with large taxable portfolios could have considerably more at stake.

Higher-income investors could receive the biggest tax cuts

Trump's $100,000 stock example shows how an individual investor could benefit, but the largest dollar savings would likely accrue to households with much bigger taxable portfolios.

A March analysis from Yale's Budget Lab estimated that under a retrospective policy covering existing assets, taxpayers in the top 0.1% of the income distribution would receive an average tax cut of about $350,000 in 2027.

The bottom two income quintiles would receive no benefit under the analysis because they generally have little capital gains income and face 0% marginal capital gains rates.

The path to implementation is uncertain. Trump's first administration considered indexing without new legislation, but a longstanding Justice Department opinion concluded that the Treasury lacks the authority to index capital gains through regulation alone.

Bottom line

Indexing capital gains for inflation could reduce the tax bill on long-held stocks and other appreciated assets, especially when inflation accounts for a meaningful share of the gain.

Investors should avoid surprising financial mistakes, including selling or holding assets based on a tax change that has not taken effect. If it moves forward, investors with substantial taxable brokerage accounts would likely have more to gain than people whose investments are mostly held inside 401(k)s and IRAs.

This article is for informational purposes only and should not be considered investment advice.

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