Taxing the deceased could close a loophole that lets the ultra-rich avoid capital gains

Under today’s tax code, when a wealthy individual dies, heirs receive a stepped-up basis that wipes out capital-gains tax on the appreciation of assets, costing the government an estimated $70 billion each year. Analysts argue that replacing this rule with a death-sale tax—charging capital gains as if the deceased had sold the assets at market value—would raise about $536 billion over a decade, far more than the $197 billion projected for a carryover-basis reform.

The loophole also discourages investors from selling, undermining market efficiency. While a yearly tax on unrealized gains could raise even more revenue, recent Supreme Court comments suggest it may be deemed unconstitutional, leaving the death-tax approach as the more viable option. Critics warn it could force the liquidation of family businesses, but provisions for installment payments could mitigate that risk. The proposal aligns with broader progressive tax ideas such as wealth taxes and higher capital-gains rates, but faces opposition from moderate Democrats and powerful lobbying groups.