Nassios, Jason ORCID: https://orcid.org/0000-0002-0250-2608 and Giesecke, James A ORCID: https://orcid.org/0000-0002-7283-0551 (2026) Inflation Indexation, Asymmetric Loss Recognition, and the Effective Burden of Capital Gains Tax. Working Paper. Victoria University, Melbourne, Australia.

Abstract

This paper compares three capital-gains tax designs for personally held CGT assets: (i) the current Australian nominal gains system; (ii) the proposed return to inflation indexation with asymmetric treatment of real gains and losses; and, (iii) a benchmark based on symmetric treatment of real gains and losses. The analysis centres the expected capital-price path on CPI inflation, thereby isolating the tax treatment of inflation-driven capital price changes. Three findings emerge. First, under the current nominal gains system, the long-run CGT liability on an asset that merely preserves its purchasing power approaches 23.5 per cent of the asset's terminal value at top marginal rates. Second, asset-by-asset indexation with asymmetric recognition of losses imposes a tax penalty on cross-sectional dispersion in individual asset returns that, at a 30-year horizon, exceeds the burden of the current system. Third, the effective CGT burden under both the current and proposed systems is shaped by the inflation environment, although through different channels: the current system taxes inflationary nominal gains, while the proposed system widens the band of unrecognised real losses as inflation raises the indexed cost base. A symmetric real-gains tax avoids these distortions.

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