Is Step-Up in Basis Reform on the Horizon?

The Biden Administration is seeking to enact a $2 trillion infrastructure plan, which then raises the question of how to finance this government spending. One possibility we have been monitoring is that Step-Up in basis could be modified or eliminated.

What is Step-Up in basis? It’s simplest to illustrate through an example. If your great-uncle bought Microsoft stock at $20/share, he would face a significant capital gains bill if he were to sell the stock today. However, if he holds onto the stock, and you inherit it upon his passing, the stock’s basis is stepped-up, resetting its cost basis to its value at your uncle’s date of death. In other words, if Microsoft is selling for $250/share at that time, you will not pay any taxes on the increase in value from $20 to $250 per share, and will only have to pay capital gains on any future increase above $250/share.

Obviously, this is both a way for grieving heirs to avoid a nasty tax surprise, and a large tax loophole that’s especially beneficial for the wealthy. Unsurprisingly, a group of Democratic Senators have circulated a proposal curtailing Stepped-Up basis so that unrealized capital gains are taxed at death.

However, the Biden Administration is currently proposing corporate tax increases as its means to pay for infrastructure spending. Negotiations between the House, Senate, and Executive Branch are still in their infancy, so we would expect the infrastructure plan to change over time. But even though we’re not ruling out the possibility of Step-Up in basis reform, it has to clear several hurdles before it becomes law.

Given Democrats’ narrow Senate and House majorities, every Democratic Senator and nearly every Democratic House member have to agree on a bill (assuming zero Republican support, as appears likely). If corporate tax increases are scaled back, infrastructure could also be financed through debt, which is an attractive option given low interest rates. If other “pay fors” are desired (funding sources used to pay for new government spending), raising the income tax, gasoline tax, or implementing an electrical use tax are possibilities. Even if seriously considered, any Step-Up in basis reform proposals are likely to contain exemptions and loopholes—even the progressive Democratic proposal contains an exemption of $1 million per individual for unrealized capital gains. At this point, we are monitoring the infrastructure legislation, but it appears that any changes to estate tax rules are, for now, not on the table.

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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation.  Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.