What Does S.798 Change for Taxpayers?

In February 2025, Senator Ted Cruz (R-TX) introduced S.798, titled the Capital Gains Inflation Relief Act of 2025. Cosponsored by outgoing Senator Thom Tillis (R-NC), this bill would allow taxpayers to adjust the original purchase price of assets for inflation when calculating capital gains tax liability. Assets are property such as stocks and real estate, while capital gains tax liability is the amount of tax owed on profits from selling said assets. The Act’s provisions are limited to individual taxpayers and would only apply to assets held for at least three years if passed. As of August 2026, it sits in the Senate Committee on Finance, where it was referred following its introduction.

S.798 also revolves around the distinction between nominal and real gains. Nominal gains refer to the growth of an asset’s value in terms of dollars, while real gains refer to the growth of an asset’s value in terms of purchasing power, or the quantity of goods and services a given sum of money can buy. For example, if a stock rises 10% in one year before it is sold, the investor realizes a 10% nominal gain which reflects that asset’s dollar value. However, the investor only realizes a 6% real gain if inflation over that same period was 4%. Current investment law would cause this investor to incur capital gains tax liability on the 10% nominal gain even though their investment only grew by 6% in real terms. S.798 aims to remedy this discrepancy by increasing the original purchase price to account for inflation using the GDP deflator, a measure of the change in price level across all goods and services in the economy. This means that investors would only be taxed on real gains from asset sales.

Political and Legislative Context

The concept of indexing capital gains taxes to inflation is not new. Senator Cruz has introduced similar legislation in the past, and the idea has surfaced under multiple Republican administrations. President George H.W. Bush’s investigation of the matter sparked ongoing legal debate about whether Congress is required to enact this change or whether the Treasury’s connection to the executive branch gives the president the power to act unilaterally. This policy proposal has reemerged in mainstream political discourse due to the period of high inflation following the COVID-19 pandemic, prompting conservative groups to encourage President Trump to test the measure’s legality. By June 2022, post-COVID fallout increased consumer prices by 9.1% and widened the gap between nominal and real gains. This caused investors selling their assets to accrue large capital gains liabilities despite comparatively small gains in purchasing power. 

Arguments in Favor of S.798

The central argument in favor of S.798 is one of fairness. Proponents of indexing capital gains taxes to inflation argue that the inflationary portion of an asset’s nominal value growth does not represent actual wealth creation and should not be taxed as such. As argued by the Cato Institute, “no one should owe taxes on money they never actually made.” Consider an investor who purchases a stock for $100 and sells it a year later for $105. If inflation over this period equals the stock’s nominal return of 5%, the investor’s real gain will be $0. However, they would still incur capital gains tax liability because the dollar value of their investment grew and suffer a net loss on their investment after paying taxes. Under S.798, they would incur no tax liability from this transaction since they saw no gain in real terms. The Cato Institute also argues that periods of high inflation can impose unreasonably harsh penalties on investment assets by imposing high tax rates on top of economy-created negative returns. These effects mean that investors must pay more to continue ownership of their assets.

Supporters of S.798 also contend that indexing capital gains to inflation would reduce an economic phenomenon known as the “lock-in effect,” whereby investors avoid selling assets in order to avoid capital gains tax liability. S.798 would incentivize investors to sell assets more quickly, increasing asset turnover and freeing up capital that would otherwise remain locked in underperforming or suboptimal investments. An IRS-affiliated study found that less than 20% of the $116 trillion in capital gains accrued from 1954-2021 was ever reported on tax returns. While many other factors impact an investor’s decision of when to sell assets, the lock-in effect is widely considered a contributor to this gap between accrued and realized gains. 

By reducing the tax burden associated with the sale of assets, supporters argue S.798 would allow capital to flow more efficiently toward new investment opportunities such as the housing market. Though the median sale price of houses has risen 34.49% in the last decade and placed homeownership out of most Americans’ reach, reduced capital gains could encourage more homeowners to sell, resulting in an increased housing supply and reducing prices. Supporters argue that such a housing market would make it easy for young and first-time homebuyers to secure housing and accumulate wealth more effectively, given that home equity represents the largest component of household wealth for most American families.

Arguments Against S.798

The central argument against S.798 is rooted in concerns over inequality, as opponents argue that indexing capital gains taxes for inflation would disproportionately benefit wealthy Americans. Capital gains are highly concentrated among the highest earners, with the wealthiest 10% accounting for 75.7% of all capital gains, and receive preferential tax treatment relative to income. The Yale Budget Lab modeled similar tax cut policies for capital gains and found them to be regressive, meaning they disproportionately benefit high-income households. The top 0.1% of earners would see average tax savings of roughly $350,000, while the bottom 40% of earners would see no benefit at all. The Lab’s forecast also finds that indexing capital gains to inflation would reduce tax revenues by $170 billion over the next decade, constituting a $17 billion loss of tax revenue comparable to the combined annual budgets of the Federal Bureau of Investigation (FBI) and Environmental Protection Agency (EPA). Besides perpetuating the nation’s wealth gap, these results lead critics to argue that S.798 would widen the federal budget deficit without accompanying tax increases or cuts to spending.

Economists also question whether S.798 would meaningfully change investor behavior, casting doubt on the scale of the lock-in effect relative to tax revenue loss. Because the lock-in effect is only applicable to stocks held by individual investors within taxable accounts, S.798’s potential to reduce the lock-in effect would only apply to a fraction of all held stocks. A separate dynamic limits S.798’s potential impact on the housing market. Preexisting tax exemptions mean that an estimated 95% of households would owe no capital gains taxes on the sale of their homes, meaning that reforms resulting from S.798 wouldn’t make it any easier for the owners of those homes to make a profit from the sale. Most critics take this limitation to mean that the Act wouldn’t have any impact on  investor behavior. 

Financial experts worry that the Act might have negative implications for economic activity. Washington tax policy expert Steve Rosenthal believes that indexing gains to inflation would create more tax shelters for wealthy Americans, while budget responsibility advocate Maya MacGuineas views indexing-prompted increases in short-term borrowing as something that will eat away at long-term economic stability and worsen the impact of future downturns.

Conclusion

S.798 and its surrounding debate reflect a broader conversation on encouraging investment and capital mobility while maintaining a sustainable, fair tax system. Supporters of the Act feel that taxes on the inflationary portion of capital gains are fundamentally unjust, and that S.798 would correct this by ensuring investors are only taxed on real economic gains. They believe that a reduced tax bill would encourage the sale of long-held assets, free up capital for new investments and put downward pressure on housing prices by encouraging the sale of long-held assets. S.798’s opponents argue that the Act would amount to a tax cut for the wealthiest Americans, with everyday Americans seeing little to no direct benefit. They also point to the bill’s substantial fiscal costs and question whether it would meaningfully alter investor behavior, given that the lock-in effect only applies to a fraction of total assets. 

As of August 2026, S.798 remains under review by the Senate Finance Committee with no clear path to a floor vote. Regardless of this specific outcome, the underlying debate over inflation and its relationship with capital gains taxation is likely to continue. 

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