Capital Gains Inflation Relief Act of 2023

II 118TH CONGRESS 1ST SESSION S. 1225 To amend the Internal Revenue Code of 1986 to provide for the indexing of certain assets for purposes of determining gain or loss. IN THE SENATE OF THE UNITED STATES APRIL 20, 2023 Mr. CRUZ (for himself, Mr. BRAUN, and Mr. HAGERTY) introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986 to provide for the indexing of certain assets for purposes of deter- mining gain or loss. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Capital Gains Inflation 4 Relief Act of 2023’’. 5 SEC. 2. INDEXING OF CERTAIN ASSETS FOR PURPOSES OF 6 DETERMINING GAIN OR LOSS. 7 (a) IN GENERAL.—Part II of subchapter O of chap- 8 ter 1 of the Internal Revenue Code of 1986 (relating to 9 basis rules of general application) is amended by redesig- 10 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 2 •S 1225 IS nating section 1023 as section 1024 and by inserting after 1 section 1022 the following new section: 2 ‘‘SEC. 1023. INDEXING OF CERTAIN ASSETS FOR PURPOSES 3 OF DETERMINING GAIN OR LOSS. 4 ‘‘(a) GENERAL RULE.— 5 ‘‘(1) INDEXED BASIS SUBSTITUTED FOR AD- 6 JUSTED BASIS.—Solely for purposes of determining 7 gain or loss on the sale or other disposition by a tax- 8 payer (other than a corporation) of an indexed asset 9 which has been held for more than 3 years, the in- 10 dexed basis of the asset shall be substituted for its 11 adjusted basis. 12 ‘‘(2) EXCEPTION FOR DEPRECIATION, ETC.— 13 The deductions for depreciation, depletion, and am- 14 ortization shall be determined without regard to the 15 application of paragraph (1) to the taxpayer or any 16 other person. 17 ‘‘(3) WRITTEN DOCUMENTATION REQUIRE- 18 MENT.—Paragraph (1) shall apply only with respect 19 to indexed assets for which the taxpayer has written 20 documentation of the original purchase price paid or 21 incurred by the taxpayer to acquire such asset. 22 ‘‘(b) INDEXED ASSET.— 23 ‘‘(1) IN GENERAL.—For purposes of this sec- 24 tion, the term ‘indexed asset’ means— 25 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 3 •S 1225 IS ‘‘(A) any common stock in a C corporation 1 (other than a foreign corporation), 2 ‘‘(B) any digital asset, or 3 ‘‘(C) any tangible property, 4 which is a capital asset or property used in the trade 5 or business (as defined in section 1231(b)). 6 ‘‘(2) STOCK IN CERTAIN FOREIGN CORPORA- 7 TIONS INCLUDED.—For purposes of this section— 8 ‘‘(A) IN GENERAL.—The term ‘indexed 9 asset’ includes common stock in a foreign cor- 10 poration which is regularly traded on an estab- 11 lished securities market. 12 ‘‘(B) EXCEPTION.—Subparagraph (A) 13 shall not apply to— 14 ‘‘(i) stock of a foreign investment 15 company, 16 ‘‘(ii) stock in a passive foreign invest- 17 ment company (as defined in section 18 1297), 19 ‘‘(iii) stock in a foreign corporation 20 held by a United States person who meets 21 the requirements of section 1248(a)(2), 22 and 23 ‘‘(iv) stock in a foreign personal hold- 24 ing company. 25 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 4 •S 1225 IS ‘‘(C) TREATMENT OF AMERICAN DEPOSI- 1 TORY RECEIPTS.—An American depository re- 2 ceipt for common stock in a foreign corporation 3 shall be treated as common stock in such cor- 4 poration. 5 ‘‘(3) DIGITAL ASSET.—For purposes of this sec- 6 tion, the term ‘digital asset’ means any natively elec- 7 tronic asset which— 8 ‘‘(A) is recorded on a cryptographically se- 9 cured distributed ledger, and 10 ‘‘(B) is designed to confer only economic 11 or access rights. 12 ‘‘(c) INDEXED BASIS.—For purposes of this sec- 13 tion— 14 ‘‘(1) GENERAL RULE.—The indexed basis for 15 any asset is— 16 ‘‘(A) the adjusted basis of the asset, in- 17 creased by 18 ‘‘(B) the applicable inflation adjustment. 19 ‘‘(2) APPLICABLE INFLATION ADJUSTMENT.— 20 The applicable inflation adjustment for any asset is 21 an amount equal to— 22 ‘‘(A) the adjusted basis of the asset, multi- 23 plied by 24 ‘‘(B) the percentage (if any) by which— 25 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 5 •S 1225 IS ‘‘(i) the gross domestic product 1 deflator for the last calendar quarter end- 2 ing before the asset is disposed of, exceeds 3 ‘‘(ii) the gross domestic product 4 deflator for the last calendar quarter end- 5 ing before the asset was acquired by the 6 taxpayer. 7 The percentage under subparagraph (B) shall be 8 rounded to the nearest 1⁄10 of 1 percentage point. 9 ‘‘(3) GROSS DOMESTIC PRODUCT DEFLATOR.— 10 The gross domestic product deflator for any cal- 11 endar quarter is the implicit price deflator for the 12 gross domestic product for such quarter (as shown 13 in the last revision thereof released by the Secretary 14 of Commerce before the close of the following cal- 15 endar quarter). 16 ‘‘(d) SUSPENSION OF HOLDING PERIOD WHERE DI- 17 MINISHED RISK OF LOSS; TREATMENT OF SHORT 18 SALES.— 19 ‘‘(1) IN GENERAL.—If the taxpayer (or a re- 20 lated person) enters into any transaction which sub- 21 stantially reduces the risk of loss from holding any 22 asset, such asset shall not be treated as an indexed 23 asset for the period of such reduced risk. 24 ‘‘(2) SHORT SALES.— 25 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 6 •S 1225 IS ‘‘(A) IN GENERAL.—In the case of a short 1 sale of an indexed asset with a short sale period 2 in excess of 3 years, for purposes of this title, 3 the amount realized shall be an amount equal 4 to the amount realized (determined without re- 5 gard to this paragraph) increased by the appli- 6 cable inflation adjustment. In applying sub- 7 section (c)(2) for purposes of the preceding sen- 8 tence, the date on which the property is sold 9 short shall be treated as the date of acquisition 10 and the closing date for the sale shall be treat- 11 ed as the date of disposition. 12 ‘‘(B) SHORT SALE PERIOD.—For purposes 13 of subparagraph (A), the short sale period be- 14 gins on the day that the property is sold and 15 ends on the closing date for the sale. 16 ‘‘(e) TREATMENT OF REGULATED INVESTMENT 17 COMPANIES AND REAL ESTATE INVESTMENT TRUSTS.— 18 ‘‘(1) ADJUSTMENTS AT ENTITY LEVEL.— 19 ‘‘(A) IN GENERAL.—Except as otherwise 20 provided in this paragraph, the adjustment 21 under subsection (a) shall be allowed to any 22 qualified investment entity (including for pur- 23 poses of determining the earnings and profits of 24 such entity). 25 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 7 •S 1225 IS ‘‘(B) EXCEPTION FOR CORPORATE SHARE- 1 HOLDERS.—Under regulations— 2 ‘‘(i) in the case of a distribution by a 3 qualified investment entity (directly or in- 4 directly) to a corporation— 5 ‘‘(I) the determination of whether 6 such distribution is a dividend shall be 7 made without regard to this section, 8 and 9 ‘‘(II) the amount treated as gain 10 by reason of the receipt of any capital 11 gain dividend shall be increased by the 12 percentage by which the entity’s net 13 capital gain for the taxable year (de- 14 termined without regard to this sec- 15 tion) exceeds the entity’s net capital 16 gain for such year determined with re- 17 gard to this section, and 18 ‘‘(ii) there shall be other appropriate 19 adjustments (including deemed distribu- 20 tions) so as to ensure that the benefits of 21 this section are not allowed (directly or in- 22 directly) to corporate shareholders of quali- 23 fied investment entities. 24 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 8 •S 1225 IS For purposes of the preceding sentence, any 1 amount includible in gross income under section 2 852(b)(3)(D) shall be treated as a capital gain 3 dividend and an S corporation shall not be 4 treated as a corporation. 5 ‘‘(C) EXCEPTION FOR QUALIFICATION 6 PURPOSES.—This section shall not apply for 7 purposes of sections 851(b) and 856(c). 8 ‘‘(D) EXCEPTION FOR CERTAIN TAXES IM- 9 POSED AT ENTITY LEVEL.— 10 ‘‘(i) TAX ON FAILURE TO DISTRIBUTE 11 ENTIRE GAIN.—If any amount is subject to 12 tax under section 852(b)(3)(A) for any 13 taxable year, the amount on which tax is 14 imposed under such section shall be in- 15 creased by the percentage determined 16 under subparagraph (B)(i)(II). A similar 17 rule shall apply in the case of any amount 18 subject to tax under paragraph (2) or (3) 19 of section 857(b) to the extent attributable 20 to the excess of the net capital gain over 21 the deduction for dividends paid deter- 22 mined with reference to capital gain divi- 23 dends only. The first sentence of this 24 clause shall not apply to so much of the 25 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 9 •S 1225 IS amount subject to tax under section 1 852(b)(3)(A) as is designated by the com- 2 pany under section 852(b)(3)(D). 3 ‘‘(ii) OTHER TAXES.—This section 4 shall not apply for purposes of determining 5 the amount of any tax imposed by para- 6 graph (4), (5), or (6) of section 857(b). 7 ‘‘(2) ADJUSTMENTS TO INTERESTS HELD IN 8 ENTITY.— 9 ‘‘(A) REGULATED INVESTMENT COMPA- 10 NIES.—Stock in a regulated investment com- 11 pany (within the meaning of section 851) shall 12 be an indexed asset for any calendar quarter in 13 the same ratio as— 14 ‘‘(i) the average of the fair market 15 values of the indexed assets held by such 16 company at the close of each month during 17 such quarter, bears to 18 ‘‘(ii) the average of the fair market 19 values of all assets held by such company 20 at the close of each such month. 21 ‘‘(B) REAL ESTATE INVESTMENT 22 TRUSTS.—Stock in a real estate investment 23 trust (within the meaning of section 856) shall 24 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 10 •S 1225 IS be an indexed asset for any calendar quarter in 1 the same ratio as— 2 ‘‘(i) the fair market value of the in- 3 dexed assets held by such trust at the close 4 of such quarter, bears to 5 ‘‘(ii) the fair market value of all as- 6 sets held by such trust at the close of such 7 quarter. 8 ‘‘(C) RATIO OF 80 PERCENT OR MORE.—If 9 the ratio for any calendar quarter determined 10 under subparagraph (A) or (B) would (but for 11 this subparagraph) be 80 percent or more, such 12 ratio for such quarter shall be 100 percent. 13 ‘‘(D) RATIO OF 20 PERCENT OR LESS.—If 14 the ratio for any calendar quarter determined 15 under subparagraph (A) or (B) would (but for 16 this subparagraph) be 20 percent or less, such 17 ratio for such quarter shall be zero. 18 ‘‘(E) LOOK-THRU OF PARTNERSHIPS.—For 19 purposes of this paragraph, a qualified invest- 20 ment entity which holds a partnership interest 21 shall be treated (in lieu of holding a partnership 22 interest) as holding its proportionate share of 23 the assets held by the partnership. 24 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 11 •S 1225 IS ‘‘(3) TREATMENT OF RETURN OF CAPITAL DIS- 1 TRIBUTIONS.—Except as otherwise provided by the 2 Secretary, a distribution with respect to stock in a 3 qualified investment entity which is not a dividend 4 and which results in a reduction in the adjusted 5 basis of such stock shall be treated as allocable to 6 stock acquired by the taxpayer in the order in which 7 such stock was acquired. 8 ‘‘(4) QUALIFIED INVESTMENT ENTITY.—For 9 purposes of this subsection, the term ‘qualified in- 10 vestment entity’ means— 11 ‘‘(A) a regulated investment company 12 (within the meaning of section 851), and 13 ‘‘(B) a real estate investment trust (within 14 the meaning of section 856). 15 ‘‘(f) OTHER PASS-THRU ENTITIES.— 16 ‘‘(1) PARTNERSHIPS.— 17 ‘‘(A) IN GENERAL.—In the case of a part- 18 nership, the adjustment made under subsection 19 (a) at the partnership level shall be passed 20 through to the partners. 21 ‘‘(B) SPECIAL RULE IN THE CASE OF SEC- 22 TION 754 ELECTIONS.—In the case of a transfer 23 of an interest in a partnership with respect to 24 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 12 •S 1225 IS which the election provided in section 754 is in 1 effect— 2 ‘‘(i) the adjustment under section 3 743(b)(1) shall, with respect to the trans- 4 feror partner, be treated as a sale of the 5 partnership assets for purposes of applying 6 this section, and 7 ‘‘(ii) with respect to the transferee 8 partner, the partnership’s holding period 9 for purposes of this section in such assets 10 shall be treated as beginning on the date 11 of such adjustment. 12 ‘‘(2) S CORPORATIONS.—In the case of an S 13 corporation, the adjustment made under subsection 14 (a) at the corporate level shall be passed through to 15 the shareholders. This section shall not apply for 16 purposes of determining the amount of any tax im- 17 posed by section 1374 or 1375. 18 ‘‘(3) COMMON TRUST FUNDS.—In the case of a 19 common trust fund, the adjustment made under sub- 20 section (a) at the trust level shall be passed through 21 to the participants. 22 ‘‘(4) INDEXING ADJUSTMENT DISREGARDED IN 23 DETERMINING LOSS ON SALE OF INTEREST IN ENTI- 24 TY.—Notwithstanding the preceding provisions of 25 VerDate Sep 11 2014 02:32 Apr 27, 2023 Jkt 039200 PO 00000 Frm 00012 Fmt 6652 Sfmt 6201 E:\BILLS\S1225.IS S1225 pbinns on DSKJLVW7X2PROD with $$_JOB 13 •S 1225 IS this subsection, for purposes of determining the 1 amount of any loss on a sale or exchange of an in- 2 terest in a partnership, S corporation, or common 3 trust fund, the adjustment made under subsection 4 (a) shall not be taken into account in determining 5 the adjusted basis of such interest. 6 ‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.— 7 ‘‘(1) IN GENERAL.—This section shall not apply 8 to any sale or other disposition of property between 9 related persons except to the extent that [Text truncated for display. 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