Version: 0.2 (Draft) Date: March 16, 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.
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 | $2,500,000 | $5,000,000 | CPI, annually |
| Phase-Out Ceiling | C | $10,000,000 | $20,000,000 | CPI, annually |
The top rate (T) is inherited from the income tax code: currently 37%. It is not a framework parameter.
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.
Four events trigger realization of capital gains:
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 ($18K/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.
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.
Cost basis is fully adjusted for inflation using the Consumer Price Index:
adjusted_basis = original_basis × (CPI_sale / CPI_purchase)
Symmetry by design: CPI adjustment applies universally to all transactions, whether sold at a gain or a loss. Because terminal realization (Rule 3) ensures deferred gains are eventually taxed, asymmetric rules to handicap tax-loss harvesting are unnecessary. The framework taxes only real economic gains and recognizes only real economic losses.
For assets acquired by gift or deemed realization at death, the basis date resets to the transfer date.
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 (after CPI adjustment) within each calendar year |
| Decrements | Net realized losses (after CPI adjustment) within each calendar year |
| Negative floor | -E (-$2.5M individual, -$5M 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 |
| CPI treatment | Both gains and losses enter at real (CPI-adjusted) value |
Marriage:
Divorce:
Qualified dividends: Count against the lifetime counter and are taxed on the same sliding scale. Ordinary dividends taxed as ordinary income (unchanged).
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 |
| Section 1202 / QSBS (qualified small business stock) | Replaced by universal lifetime exemption |
| 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 ($18K/person/year). Existing exit tax on expatriation (IRC §877A), strengthened by alignment with framework’s realization events.
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 real gain/loss
net = 0
For each transaction:
cpi_adjusted_basis = purchase_price × (CPI[sale_date] / CPI[purchase_date])
real_result = sale_price - cpi_adjusted_basis
net = net + real_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).
These are acknowledged areas where the spec is incomplete or where reasonable people may disagree:
This spec is version-controlled alongside the PR-FAQ and essay. When mechanics change, update this document first, then propagate to derived documents.