Loopholes 102 – Stepped-Up Basis

Loopholes 102

Stepped-Up Basis

One Sentence Argument

The stepped-up basis allows ultra-wealthy families to avoid paying billions in taxes, and should be repealed.

Issue Breakdown

There’s an even bigger tax break for the children of wealthy parents than limiting the estate tax, and it’s one that doesn’t get talked about a lot. It’s called the stepped-up basis.

The stepped-up basis is a tax benefit for people inheriting assets like stocks or land instead of money (which is often the case for the ultra-rich, they rarely keep their fortunes in cash) that allows families to completely avoid paying capital gains taxes on those assets.

Normally, long term capital gains taxes are assessed on increases in the value of an asset. So if you bought a bundle of stocks worth $50 million a few years ago and then sold it for $90 million, you would have to pay taxes on that gain of $40 million. But what if you didn’t sell those stocks? You only pay capital gains taxes when you sell your assets, not when their value goes up. If you don’t sell the stocks, you don’t pay taxes on them. That’s all totally reasonable.

The problem arises, however, when someone with a lot of assets dies and passes those assets down to their heirs. Rather than continue to treat the “basis,” or starting price of the asset, at where it was when it was first purchased, the basis is “stepped-up” for the heirs, meaning that for the purposes of their sale of the asset, the original value is whatever it was when they inherited it.

So if you passed along that $90 million bundle of stocks to your heirs (which you bought for $50 million and has increased in value by $40 million without you paying any taxes on it), and they then sold it for $110 million a few years later, they would only pay taxes on $20 million in gains, not $60 million.

This means all of that increase in value will go to that family without anyone ever paying taxes on it.

Who Benefits

This little piece of the tax code has massive implications. Some of the wealthiest families in America have huge amounts of assets that have never been and will never be taxed. Sam Walton never paid taxes on the increased value of his ownership stake in Walmart from zero to tens of billions of dollars, and now his children (and his son-in-law) are five of the twenty richest people in the world, and no one ever paid one penny of taxes on the vast majority of that vast accumulation of wealth. Same with the Mars family (three more of the richest billionaires in the world are the children of Forrest Mars, who created the Mars candy fortune), and a number of others.

We’re losing out on billions in tax revenue because these billionaires managed to convince Congress that it was unfair for their kids to pay taxes on what they inherited, never mind that they got it all for free anyway.


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