The Capital Gains Tax Change That Could Hit Expats in 2026
A new push by Republican lawmakers to “index” capital gains for inflation has resurfaced as part of a potential tax package. For US expats, this proposal could introduce a complex new layer to how foreign assets are taxed.
Here is what the proposal means, why it’s different for those living abroad, and what you should do now.
Nothing has changed yet. Current capital gains rules remain in full effect. Legislative odds before the November midterms are low, and any “unilateral” action by the Treasury faces steep legal hurdles.
For a complete guide to the rules that apply right now, see our foreign capital gains tax guide for US expats.
What “Indexing to Inflation” Actually Means
The basic idea is simple. The IRS would let you adjust the original purchase price of an asset upward to reflect inflation. A higher cost basis means a smaller taxable gain. A smaller gain means a smaller tax bill.
Here is how it works under current law. You buy stock for $100,000 in 2010. You sell it in 2026 for $200,000. Your taxable gain is $100,000.
Here is how it would work with inflation indexing. The IRS would adjust your $100,000 cost basis upward to reflect cumulative inflation since 2010 (roughly 45%). Your adjusted cost basis becomes about $145,000. Your taxable gain drops to about $55,000.
The table below shows the difference:
| Current Law | With Inflation Indexing | |
| Original Purchase (2010) | $100,000 | $100,000 |
| Inflation Adjustment | None | +45% (~$45,000) |
| Adjusted Cost Basis | $100,000 | $145,000 |
| Sale Price (2026) | $200,000 | $200,000 |
| Taxable Gain | $100,000 | $55,000 |
| Tax Owed (at 15%) | $15,000 | $8,250 |
The taxable gain drops because the IRS now treats some of the price increase as inflation rather than profit.
Senator Ted Cruz of Texas, the most visible promoter of the proposal, calls the difference a “phantom gain.” Critics, including the Yale Budget Lab, point out that nearly all of the benefit flows to the top 20% of earners, with the largest savings going to the top 0.1%. The Committee for a Responsible Federal Budget estimates the cost at $170 billion to $1 trillion over a decade, depending on whether the change applies prospectively or retroactively.
Why This Matters Specifically for US Expats
For most US-based investors, indexing would mean a smaller tax bill on the same sales they would otherwise make. For US expats, it is more complicated.
Expats already adjust the cost basis of foreign assets for currency conversion. The IRS requires you to calculate every capital gain in US dollars, using the spot rate on the date of each transaction. This rule means a foreign asset that broke even in local currency can produce a taxable US gain or loss purely from exchange rate movement.
Indexing would add a second adjustment layer. Cost basis would be adjusted first for the dollar value at purchase (current rule). Then it would be adjusted again for cumulative US inflation (proposed rule).
Three open questions stand out:
- Would the inflation adjustment apply to the original local-currency purchase price, the dollar-converted cost basis, or both?
- How would indexing interact with the Foreign Tax Credit, since the FTC offsets US tax based on foreign tax paid on the same gain?
- Would the Section 121 primary residence exclusion ($250,000 single, $500,000 joint) still apply after the inflation adjustment?
These are the routine math of foreign property sales, foreign brokerage account dispositions, and foreign business interest sales. Until the proposal answers these questions in writing, the practical impact for expats remains uncertain even if the proposal becomes law.
Two Paths the Proposal Could Take
The proposal could become reality through either a legislative path or an executive path. Both face obstacles.
The Legislative Path
Republicans would need to pass a tax bill containing the indexing provision. Bloomberg reports that Ways and Means Committee Chairman Jason Smith, the top House tax writer, is skeptical. Smith called the housing-affordability framing a “narrative crafted by clever lobbyists.”
Without Smith’s support, a House bill is unlikely. Senate Finance Committee Chairman Mike Crapo personally supports indexing but has not committed to including it in any active bill. Most analysts give the proposal low odds of passing before the November midterms.
The Executive Path
Senators Cruz and Tim Scott have written to Treasury Secretary Scott Bessent. They are urging the administration to index capital gains unilaterally through regulatory action.
Whether Treasury has the legal authority to do this without Congress is contested. The Trump administration considered the same approach in 2018 and ultimately did not proceed. Any executive action would likely face immediate court challenges.
The Bipartisan Policy Center has argued that comprehensive indexing should be handled by Congress, not Treasury, given that indexing capital gains requires also examining capital losses, interest income, interest deductibility, and other parts of the tax code. That broader effort, they argue, can only be done legislatively.
The legislative path is slower but produces a more durable change. The executive path is faster but legally fragile.
What This Proposal Wouldn’t Change
Even if indexing passes, most of the foreign capital gains framework stays the same. The proposal does not affect:
- The Foreign Tax Credit. Form 1116 mechanics for offsetting US tax with foreign capital gains tax paid stay the same.
- The Section 121 primary residence exclusion. The $250,000 / $500,000 limits would still apply.
- The Net Investment Income Tax. The 3.8% NIIT on high earners is unaffected.
- PFIC rules. Foreign mutual fund taxation under Sections 1291, MTM, and QEF stays the same.
- Foreign reporting requirements. FBAR, Form 8938, Form 8621, and all other reporting obligations are unaffected.
- Currency conversion. The requirement to calculate gains in US dollars using transaction-date spot rates does not change.
Indexing changes one thing: the cost basis used to calculate the gain. Everything that wraps around that calculation stays in place.
What Expats Should Do While the Proposal Is Being Debated
The political and legal uncertainty makes this a poor time to restructure tax planning around the proposal. Three rules of thumb apply, depending on your timeline:
If you have a planned sale in the next 6 months, proceed on your normal timeline. Indexing will not pass that fast through legislation. Any executive action would face immediate court challenges that would create their own uncertainty. Selling on your planned schedule under known rules is almost always better than waiting for unknown rules.
If you have a planned sale 12 to 24 months out, stay aware of the political process. Do not change your timing based on the proposal alone. The base case is that indexing does not pass before midterms. If the political math changes after November, you can revisit.
If you are holding assets indefinitely, indexing might affect your eventual tax bill if it passes. No action is required now. Continue planning based on current rules.
For any expat with a meaningful foreign sale on the horizon, the practical advice is unchanged. Model the US tax outcome under current law. Plan around the Foreign Tax Credit. Account for currency conversion correctly. Watch for actual legislation rather than proposals.
We cover the full strategy framework in our guide to foreign capital gains tax for US Expats.
The Bottom Line
The Republican proposal to index capital gains for inflation is real, well-funded politically, and unlikely to pass before November.
If it does pass, it would lower the taxable gain on most sales by adjusting the cost basis upward for inflation. For expats, the interaction with currency conversion rules is the most important question. The proposal as currently drafted does not answer it clearly.
Nothing has changed under current law. The Foreign Tax Credit, the Section 121 exclusion, NIIT, PFIC rules, and all reporting requirements remain in effect.
We will update this article if the proposal advances or if Treasury takes executive action.
Planning a foreign sale this year?
