Version: 0.5 (Draft) Date: October 14, 2026 Status: Working document
This document is the canonical source of truth for the framework’s mechanics. Related documents are derived from this spec. If a conflict exists, this document governs.
This specification addresses the treatment of capital gains in taxable brokerage accounts and other non-retirement investment vehicles. The integration of retirement accounts (traditional and Roth 401(k)s, IRAs, 529s, HSAs, and other tax-advantaged vehicles) with the Lifetime Gains Framework is addressed in a separate proposal, “One Account to Rule Them All.” Until that proposal is enacted, existing retirement account rules apply without modification.
The framework is federal. State capital gains taxes (which vary widely) and state estate taxes are unaffected by this specification.
The framework has two adjustable parameters. All other values are derived or inherited from existing law.
| Parameter | Symbol | Individual | Married Filing Jointly | Indexed |
|---|---|---|---|---|
| Lifetime Exemption | E | $2,000,000 | $4,000,000 | CPI, annually |
| Phase-Out Ceiling | C | $6,000,000 | $12,000,000 | CPI, annually |
Indexing. E and C are CPI-indexed annually using the prior calendar year’s year-end CPI-U, paralleling tax brackets and the standard deduction. Cost basis is not indexed: gains are measured in nominal dollars, as under current law. (Basis indexing was Rule 4 through v0.4; removed in v0.5, see Section 7.)
The top rate (T) is inherited from the income tax code: currently 37%. It is not a framework parameter.
Breakeven against current law (informational): at these parameters, a single filer with cumulative lifetime gains of approximately $11.2M pays the same tax under the framework as under current law’s 23.8% top combined LTCG + NIIT rate. Below that cumulative gain, the taxpayer pays less under the framework; above, they pay more.
Every individual receives a lifetime capital gains exemption of E. Gains within the exemption are taxed at 0%.
Above E, the capital gains rate phases linearly from 0% to T over the range [E, C].
Rate at any counter position P (where P > E):
rate(P) = min(T, T × (P - E) / (C - E))
Tax on a tranche of gains from counter position P₁ to P₂ (where E ≤ P₁ < P₂):
tax = ((rate(P₁) + rate(P₂)) / 2) × (P₂ - P₁)
This endpoint averaging is exact for a linear scale (equivalent to integrating the area under the curve).
Above C: All gains taxed at T. No further calculation needed.
Critical design choice: T is always the top marginal income tax rate (currently 37%), regardless of the taxpayer’s other income. A retiree with $0 W-2 income and $15M in lifetime gains pays 37% on gains above C, identical to a W-2 earner at $500K. Capital gains under this framework are taxed on a separate schedule that converges to the same top rate as ordinary income but does not stack within ordinary income brackets.
Gains are realized when the tax ownership of an appreciated asset changes. Three events trigger realization under this principle: sale, gift (including gifts to qualified charities), and death.
In addition, leveraging an appreciated asset as collateral triggers realization. This is not an ownership change; it is a separate anti-deferral rule. The owner is choosing to defer liquidation while still enjoying the benefit of the appreciation, and without this leg the ownership-change principle could be deferred indefinitely while the gain is consumed.
No charitable exception. Earlier versions of this spec carved out transfers to qualified 501(c)(3) organizations. That carve-out is removed as of v0.4: a charity is a different tax owner, so a donation of appreciated property is a realization event like any other transfer. See the Charitable Donation Treatment subsection below.
Sale. (Unchanged from current law.) Sale includes any disposition of appreciated property in exchange for other property — a barter sale is a sale. Buying a house with appreciated private stock, or acquiring a company in an all-stock deal, realizes the gain on the property given up, valued at the transaction’s agreed price. This is already the rule under existing law (§1001); the only deferral carve-out was §1031 like-kind exchanges, which this framework eliminates (see Interactions table). No new machinery is required, and no appraisal is needed: the counterparty’s acceptance sets the price, exactly as the borrowing LTV floor does.
Carve — pure stock-for-stock reorganizations (§368 continuity-of-interest). One narrow exchange is not an exit: a passive shareholder whose shares are swapped for acquirer shares in an all-stock merger receives no cash and no asset they can independently consume or control. Their illiquid holding is merely transformed. Forcing realization here creates a tax bill with no means to pay it and would freeze ordinary M&A. Treatment: carryover basis and carryover lifetime counter into the new shares, no step-up. This is deferral, not forgiveness — the embedded gain rides into the new paper and is taxed at the real exit (sale, borrowing, gift, or death). The operative line is the framework’s own test: realization occurs when an exchange yields cash, a consumable/controllable asset, or cashes out a counterparty; a pure reorganization does none of these. Any cash or non-stock consideration received (“boot”) is realized dollar-for-dollar.
Why this carve doesn’t reopen buy-borrow-die: a holder could roll appreciated stock through serial reorganizations and never sell — but the moment they borrow against the new shares, Rule 3’s borrowing trigger fires. The reorganization carve is safe only because the borrowing rule already closes that exit. Absent Rule 3’s borrowing leg, this carve would be a hole; with it, it is not.
Gift. The donor is taxed on unrealized gains at the time of transfer, using the donor’s lifetime counter. Recipient receives basis at gift-date fair market value. Annual gift exclusion ($19K/person/year) retained for administrative simplicity.
Gift valuation: For publicly traded securities, FMV is market price. For illiquid assets, existing IRS qualified appraisal requirements and valuation enforcement (Revenue Ruling 59-60) apply. Critically, the elimination of stepped-up basis creates a natural tension between donor and recipient that discourages undervaluation: if the donor lowballs the gift’s FMV, they pay less tax now — but the recipient inherits a lower basis and pays correspondingly more tax upon eventual sale or death. The total tax collected is approximately the same regardless of the stated gift value. Under current law, this tension does not exist because stepped-up basis at death eliminates the deferred tax entirely, making donor and recipient cooperative parties in undervaluation.
Borrowing against appreciated assets. When a loan is secured by appreciated assets, the unrealized gain on the collateral is deemed realized at the time of borrowing, regardless of loan purpose. Basis steps up by the deemed amount to prevent double taxation on eventual sale. If the collateral has no unrealized gain (e.g., a purchase mortgage on a newly acquired home, or collateral that is underwater), the deemed realization is $0. This rule applies universally — no distinction between personal, business, or investment purpose — eliminating the classification disputes that would otherwise become the primary enforcement challenge.
Collateral valuation: For publicly traded securities, FMV is market price — no ambiguity. For illiquid collateral (private company stock, art, real estate portfolios), the deemed FMV is no less than the value implied by the loan terms (loan amount ÷ lender’s LTV ratio). The lender’s own risk assessment, documented in loan files and subject to bank regulatory examination, serves as a third-party-verified floor.
Edge case — borrowing against zero-gain assets: A taxpayer could theoretically maintain a pool of zero-gain assets (e.g., CDs, Treasury bills) specifically to borrow against, keeping appreciated assets untouched while accessing liquidity with $0 deemed realization. This is not a material concern for three reasons:
Opportunity cost makes the exploit economically irrational. Parking $100M in low-yield instruments to maintain a zero-gain borrowing base costs roughly $5-7M/year in foregone returns versus equities. At some point, it is cheaper to simply sell appreciated assets and pay the tax.
The framework eliminates the primary motivation. Under current law, borrowing against appreciated assets is valuable because stepped-up basis at death erases the deferred tax permanently. Under this framework, death triggers realization (Rule 3), so the tax is merely deferred, not eliminated. The economic incentive to borrow instead of sell is dramatically reduced when the end state is taxation either way.
Systemic design vs. point fix. Proposals that close only the borrowing loophole — e.g., Fox & Liscow (2024), “No More Tax-Free Lunch for Billionaires” — require complex definitional rules about secured vs. unsecured lending, collateral pools, and asset-level vs. portfolio-level gain calculations. Their deemed realization mechanism is consistent with Rule 3, but their additional definitional complexity is unnecessary under a systemic framework that closes all exit routes simultaneously (sale, death, gift, borrowing). When every exit is taxed, engineering around any single one becomes economically irrational. The residual use case — borrowing against zero-gain assets for short-term liquidity timing — is legitimate financial planning, not tax avoidance.
Trust treatment: The governing principle is: if a transfer changes the tax owner of an asset, it is a realization event; if it does not, it is not. Transferring appreciated assets into an irrevocable trust changes the tax owner and is therefore a realization event (treated as a gift). Transferring assets into a revocable living trust — where the grantor remains the tax owner — is not a realization event; realization occurs when the trust becomes irrevocable or the grantor dies, whichever comes first. Trust-held assets are deemed realized upon the death of each generation’s primary beneficiary, preventing dynasty trusts from deferring gains indefinitely. This structurally eliminates GRATs, dynasty trusts, and similar vehicles: appreciated assets are taxed on the way in, and again at each generational transfer to the extent of new appreciation.
Design note: In a cleaner world, revocable living trusts would be unnecessary — they exist primarily because state probate systems are slow, expensive, and public. The framework accommodates them not as a policy choice but because the “change of tax owner” principle naturally exempts them, and penalizing ~25 million households for working around broken state courts is not this proposal’s fight. A companion recommendation for federal probate reform or uniform state probate standards would reduce the need for these structures over time.
In all cases, gains within remaining exemption headroom are tax-free; gains above are taxed on the sliding scale.
Changed in v0.4. Donations of appreciated assets to qualified 501(c)(3) charities are realization events. A charity is a different tax owner; the transfer is a gift under Rule 3 and is treated as one. Three mechanical consequences follow:
Worked example. Donor contributes $1,000,000 of appreciated stock with a basis of $100,000 (gain $900,000).
| Donor position | Gains tax | FMV deduction value | Net cost of the gift |
|---|---|---|---|
| Below the lifetime exemption | $0 | $370,000 (at 37%) | Unchanged from current law |
| Above the ceiling C (37%) | $333,000 | $370,000 | $37,000 net benefit |
The general result: the net federal subsidy on a charitable gift equals t × (basis) — the donor is subsidized on the after-tax dollars actually committed, not on appreciation that was never taxed. Because the gains leg runs on the sliding scale, this basis-alignment phases in progressively: a donor still inside the lifetime exemption keeps current-law treatment in full, while a donor above the ceiling receives a subsidy proportional to basis. A zero-basis gift at the top receives no net subsidy at the moment of donation, but still moves roughly $1.59 to charity per $1 of foregone after-tax wealth (versus $3.85 under current law).
This makes appreciated-property giving exactly as subsidized as cash giving by the same donor — 37% of the gift at the top bracket, rather than the current 74%. The framework ends the double deduction, not the deduction.
Scope. Contributions to private foundations and donor-advised funds are realization events on the same terms — the sponsoring organization is a different tax owner. Governance issues specific to those vehicles (DAF minimum payout requirements, foundation self-dealing rules) remain out of scope for this specification and are addressed in the charitable giving companion proposal.
Open — deduction vs. credit. The FMV deduction above assumes current income-tax architecture. Under the project’s income tax proposal, all deductions are eliminated and charitable giving becomes a 25% credit capped at 3% of tax liability. Pairing realization with a capped credit is a materially different (and far less generous) policy than pairing it with an FMV deduction, and that interaction is unresolved. See process/open-questions.md.
Update (July 2026): This rule (Rule 5 before v0.5) is superseded by the Universal Savings Account design in the forthcoming “One Account to Rule Them All” proposal, which absorbs the $5M balance cap (one cap, living in the USA) and replaces Roth-specific reform with account consolidation. The text below is retained as the original standalone design; it applies only if the LGF is enacted without the USA proposal.
Four changes to Roth IRAs:
At death: Roth accounts pass tax-free to beneficiaries under the existing 10-year distribution rule. No change.
No changes to Traditional 401(k), Traditional IRA, SEP IRA, SIMPLE IRA, HSA, or 529 accounts. These are deferred to a companion proposal.
The lifetime counter is the core tracking mechanism that determines exemption usage and sliding scale position.
Properties:
| Property | Rule |
|---|---|
| Scope | Per individual |
| Starting value | $0 at enactment (for existing taxpayers) or $0 at birth (for post-enactment taxpayers) |
| Increments | Net realized gains within each calendar year |
| Decrements | Net realized losses within each calendar year |
| Negative floor | -E (-$2M individual, -$4M MFJ) |
| Annual netting | Losses offset gains without limit within each year (same as current law) |
| Ordinary income offset | Up to $3,000/year of net capital losses can offset ordinary income (same as current law) |
| Loss carryforward | None needed — the counter itself is the carryforward |
| Basis | Nominal cost basis (not inflation-indexed); only E and C are indexed |
Marriage:
Divorce:
Death of a spouse (added v0.5):
Without these rules, the first death in a marriage would trigger realization on the decedent’s assets against a single $2M / $6M schedule, and the survivor would then face her own single schedule at the second death. A couple that enjoyed the $4M / $12M joint schedule for decades would lose half of it at the worst possible moment. Current law already avoids this for the estate tax (unlimited marital deduction since 1981, portable exemption since 2010). The framework keeps both ideas.
Worked example. A couple owns a farm with $8M of gain; neither spouse has used any exemption. The husband dies and leaves the farm to his wife. Years later she dies and the farm passes to their children (assume no further appreciation).
| Treatment | Tax at first death | Tax at second death | Total |
|---|---|---|---|
| No rollover, no portability (farm realized against his single $2M / $6M schedule) | $1.48M | $0 (heirs’ basis already stepped to FMV) | $1.48M |
| Rollover only (her single $2M / $6M schedule at second death) | $0 | $1.48M | $1.48M |
| Rollover + portability (her schedule becomes $4M / $12M) | $0 | $370K | $370K |
| Reference: couple realizes the same $8M while both alive, filing jointly | $370K |
Math for the portability row: band $4M to $8M, rate at $8M = 37% × (8 − 4) / (12 − 4) = 18.5%, average 9.25% × $4M = $370K.
Revenue note: not separately modeled. The main effect is timing (death-realization revenue on married decedents shifts to the second death), and the current-law baseline already has the same deferral via the marital deduction.
Qualified dividends: Count against the lifetime counter and are taxed on the same sliding scale. Ordinary dividends taxed as ordinary income (unchanged).
Open design decision — MFJ counter architecture: Two viable designs exist for married filers, each with tradeoffs:
The spec currently adopts approach #1. A fuller treatment of marriage mechanics — including titling conventions for joint brokerage accounts, community property state interactions, and prenup overrides — is deferred to a companion marriage-tax proposal.
The following provisions are rendered redundant and repealed:
| Provision | Reason |
|---|---|
| Estate tax | Replaced by deemed realization at death |
| Alternative Minimum Tax (capital gains component) | No preferential rate to exploit |
| Net Investment Income Tax (3.8% surtax) | Gains above E are ordinary income at rates » 3.8% |
| Stepped-up basis at death | Death is a realization event; heir gets clean basis at FMV |
| Section 121 (primary residence exclusion) | Replaced by universal lifetime exemption (see callout below) |
| Section 1202 / QSBS (qualified small business stock) | Replaced by universal lifetime exemption (see callout below) |
| Section 1031 (like-kind exchanges) | Deferral mechanism; incompatible with expanded realization |
| Section 1045 (QSBS rollover) | Same as above |
| Section 453 (installment sale deferral) | Same as above |
| Section 1244 (small business stock loss) | Systems converge; separate treatment unnecessary |
| Opportunity Zone deferrals | Deferral mechanism eliminated |
| Carried interest preference | No preferential rate above E |
| 60/40 rule for derivatives | No preferential rate above E |
| Collectibles rate (28%) | Single rate structure replaces all special rates |
| GRATs, dynasty trusts, valuation discounts | Gifts are realization events; stepped-up basis eliminated |
| Lifetime gift tax exemption ($13.6M) | Purpose (preventing double taxation with estate tax) no longer applies |
| Separate capital loss carryforward tracking | Counter is the carryforward |
Retained: Annual gift tax exclusion ($19K/person/year, 2026 figure, CPI-indexed). Existing exit tax on expatriation (IRC §877A), strengthened by alignment with framework’s realization events.
Section 121 currently excludes up to $250K of gain ($500K MFJ) on the sale of a primary residence held for at least 2 of the prior 5 years. Under the framework, this carveout is eliminated outright. Primary residence gains count against the lifetime counter on the same terms as any other appreciated asset.
For the median household, this is a non-event. The vast majority of primary residence gains over a lifetime fall within the $2M individual / $4M MFJ exemption. A homeowner who buys for $400K and sells for $1.2M generates an $800K gain that is fully exempt. Their counter advances by $800K, but no tax is owed.
For high-basis or high-appreciation residences (luxury markets, multi-decade holds in coastal cities), the framework treats the gain like any other large gain: tax-free up to E, on the sliding scale through C, top rate above. Sellers who would have used Section 121 multiple times across a lifetime (the “serial home flipper” pattern) lose that ability — the counter is one-shot.
Section 1202 (Qualified Small Business Stock) currently allows a 100% exclusion of gain on QSBS held at least 5 years, capped at the greater of $10M or 10× basis. The 2025 One Big Beautiful Bill Act expanded this regime, raising the cap to $15M with a tiered holding-period schedule (50% at 3 years, 75% at 4 years, 100% at 5 years) and creating a $75M lifetime cap variant.
The framework eliminates Section 1202 entirely. Founders and early employees instead use the universal $2M individual / $4M MFJ lifetime exemption, with phase-in to the top rate over the next $4M / $8M tranche. This is a meaningful loss for the largest exits (a successful founder above the $11.2M breakeven pays more under the framework than under post-OBBB QSBS), but a meaningful win for everyone below that threshold (the carve-out’s holding-period and qualification requirements disappear, and the exemption applies to all asset types, not just QSBS).
The post-OBBB expansion of Section 1202 is therefore noted but does not survive enactment of the framework.
All counters start at $0 on the date of enactment. Pre-enactment gains are not retroactively counted.
Original purchase price is retained (not enactment-date value). Pre-enactment unrealized appreciation is taxed when eventually realized under the new system, but the counter starts at $0, giving every taxpayer a fresh exemption.
Expected and acceptable. Investors may sell before enactment to realize gains at current preferential rates (15-23.8%) and reset basis. This generates immediate revenue on gains that might otherwise escape taxation via stepped-up basis. Recommended transition window: 9-12 months.
Existing Roth accounts above $5M: contributions frozen immediately, no forced distributions, no retroactive taxation. Growth continues tax-free.
For a given taxpayer in a given tax year:
INPUTS:
counter_start = lifetime counter at start of year
transactions[] = array of realized events (each with purchase_date, purchase_price, sale_price, sale_date)
E = current exemption (CPI-adjusted)
C = current ceiling (CPI-adjusted)
T = top marginal income tax rate
STEP 1: Compute net gain/loss
net = 0
For each transaction:
result = sale_price - purchase_price
net = net + result
STEP 2: Update counter
counter_end = max(-E, counter_start + net)
STEP 3: Compute tax
If net <= 0:
tax = 0 (losses may offset up to $3K ordinary income per existing rules)
If net > 0:
taxable_start = max(counter_start, E) // only gains above E are taxed
taxable_end = counter_end
If taxable_end <= E:
tax = 0 (all gains within exemption)
Else:
// Gains in the phase-up band [E, C]
band_start = max(taxable_start, E)
band_end = min(taxable_end, C)
If band_start < band_end:
rate_start = T × (band_start - E) / (C - E)
rate_end = T × (band_end - E) / (C - E)
tax_band = ((rate_start + rate_end) / 2) × (band_end - band_start)
Else:
tax_band = 0
// Gains above C
If taxable_end > C:
above_C = taxable_end - max(taxable_start, C)
tax_above = T × above_C
Else:
tax_above = 0
tax = tax_band + tax_above
OUTPUT:
tax_owed = tax
counter_end = counter_end (carried to next year)
Short-term gains (holding period ≤ 1 year) are excluded from this algorithm entirely and taxed as ordinary income on Schedule D (unchanged from current law).
A single founder sells her startup in year 10 for a $19,000,000 long-term capital gain. Her counter started at $0 at enactment and her only prior post-enactment realization was a $500,000 gain three years earlier from a secondary stock sale.
Inputs:
Step 1: Net gain. $19,000,000.
Step 2: Update counter. counter_end = $500,000 + $19,000,000 = $19,500,000.
Step 3: Compute tax.
The counter moves from $500,000 (below E) to $19,500,000 (above C). Tax has three regions:
Below E ($500K → $2M = $1.5M of gain): taxed at 0%. Tax = $0.
Phase-in band ($2M → $6M = $4M of gain):
Above C ($6M → $19.5M = $13.5M of gain): taxed at 37%.
Total framework tax: $0 + $740,000 + $4,995,000 = $5,735,000
Effective rate on the $19M sale: 30.2%.
For comparison — same founder under current law (post-OBBB QSBS, all qualifying):
Delta: Founder pays roughly $4.78M more under the framework. This is the bargain the framework strikes: founders below the $11.2M breakeven win, those above it lose. The framework loses on this individual case to the post-OBBB QSBS regime, but recovers across the broader population by eliminating the carve-out entirely.
These are acknowledged areas where the spec is incomplete or where reasonable people may disagree:
Resolved in v0.5:
process/decisions-log.md (2026-10-14).Resolved in v0.3:
This spec is version-controlled alongside the PR-FAQ and essay. When mechanics change, update this document first, then propagate to derived documents.