With the cost of living on every voter’s mind, an old idea is getting a new push on Capitol Hill: fixing a flaw in the tax code that makes everything more expensive.

Anyone who has ever sold a home, stock, or even a collectible is familiar with it. When you sell an asset that has risen in price, the IRS taxes the gain. But that gain is measured against the price you paid, not your true cost. If you bought a stock, a bond, or a business many years ago, and its price merely kept pace with inflation, you are no richer in purchasing power than the day you bought it—yet the tax code treats the difference as income and taxes it anyway. This is especially noticeable in periods of high inflation, like the last five years.

It is a tax on rising prices, dressed up as a tax on profit. And every year inflation quietly increases the amount we owe without a vote from Congress or an action from the president.

The distinction is more than semantic. Cost is the time, energy, and resources it takes to acquire something—it is “real,” and it holds its meaning across time. Price is “nominal”—transitory, dependent on the value of the time and place it happens to be paid in. And although the letter of the law taxes “cost,” the term was left undefined. Decades of administrative interpretation have effectively turned it into a tax on prices instead.

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The idea of fixing this—that is, indexing capital gains so that only real gains are taxed—is not new. Conservatives have urged it for more than 30 years. George H.W. Bush’s administration considered the policy in 1992. But high inflation and the affordability crisis have put it back in the news. For instance, Sen. Ted Cruz (R-Texas) has introduced the Capital Gains Inflation Relief Act to index gains by statute. A coalition of free-market groups has pressed the Trump administration to do it by regulation.

Just since 2020, the prices Americans pay have risen more than 26 percent. With federal rates on capital gains reaching 23.8 percent, Americans routinely pay real tax on paper gains.

Take a young worker, cautious about the future, who in 2020 put $100,000 into a balanced portfolio—about 40 percent stocks, the rest in bonds. By the end of 2025, it showed roughly 48 percent appreciation: an apparent gain of $48,000.

But consumer prices climbed 26 percent over those years, so more than half of that apparent gain was never real wealth. It was inflation.

The tax code doesn’t see the difference. It taxes the full $48,000 as income, part of the bill falling on inflation that was never earned. At the 15 percent capital-gains rate many workers pay, he is left—after inflation and taxes—with a real gain of only about $15,000, barely one-third of what that paper statement promised.

This is a tax increase no Congress ever explicitly voted for and no president ever signed into law. It falls on anyone who saves and invests—the retiree cashing out a lifetime’s nest egg, the family selling a long-held asset, the small investor—while the government that printed the money gets to collect revenue on the inflation it created at their expense.

The damage goes beyond unfairness. To tax phantom gains is to freeze capital in place. Economists call it the lock-in effect: When selling means paying tax partly on inflation, investors hesitate to sell. They cling to yesterday’s assets rather than move money into tomorrow’s—the new company, the new building, the more productive use.

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Capital that should be recycled through the economy instead sits idle to avoid a tax on inflation. The result is quiet, compounding malinvestment: an economy that holds instead of building. Relief from this would not be a carve-out or special-interest break: The goal is to stop taxing inflation wherever it appears, not to pick winners.

How do we get there? The cleanest path is legislative—Congress could index gains and settle the matter, as Cruz’s bill would do. But this is a Congress that struggles to pass a budget or advance even common-sense solutions.

And there is an argument that Treasury can act directly under current law. Recall that the statute taxes gains against “cost” while never defining the word itself; the only definition sits in a Treasury regulation. Whether the department may read “cost” in real, inflation-adjusted terms is genuinely contested, and the courts may ultimately have to decide it. But a term Congress left undefined—and that the government has previously, by regulation, interpreted as “price”—is, at the least, worth Treasury’s serious examination.

The principle is simple and sound. A capital gain should mean a real gain—an increase in purchasing power, not a number inflated by the government’s own monetary policy. Indexing for inflation effectively solves this problem. It says simply that we tax what a person actually earned, not what inflation manufactured.