Add capital gains basis indexation reform

policyengine_us/parameters/gov/irs/capital_gains/indexation/applies.yaml

@@ -0,0 +1,10 @@
+description: Whether long-term capital gains cost basis is indexed to inflation.
+values:
+  2013-01-01: false
+metadata:
+  unit: bool
+  period: year
+  label: Capital gains basis indexation applies
+  reference:
+    - title: Yale Budget Lab, Indexing Capital Gains to Inflation
+      href: https://budgetlab.yale.edu/research/indexing-capital-gains-inflation

policyengine_us/parameters/gov/irs/capital_gains/indexation/cap_adjustment_to_gain.yaml

@@ -0,0 +1,10 @@
+description: Whether basis indexation is capped so it cannot turn a long-term capital gain into a loss.
+values:
+  2013-01-01: true
+metadata:
+  unit: bool
+  period: year
+  label: Capital gains basis indexation no-loss cap
+  reference:
+    - title: Yale Budget Lab, Indexing Capital Gains to Inflation
+      href: https://budgetlab.yale.edu/research/indexing-capital-gains-inflation

policyengine_us/parameters/gov/irs/capital_gains/indexation/chained_cpi_transition_year.yaml

@@ -0,0 +1,11 @@
+description: Capital gains basis indexation uses chained CPI-U from this calendar year onward.
+values:
+  2013-01-01: 2017
+metadata:
+  unit: year
+  period: year
+  label: Capital gains basis indexation chained CPI transition year
+  reference:
+    - title: Yale Budget Lab, Indexing Capital Gains to Inflation
+      href: https://budgetlab.yale.edu/research/indexing-capital-gains-inflation
+

policyengine_us/parameters/gov/irs/capital_gains/indexation/minimum_holding_period.yaml

@@ -0,0 +1,10 @@
+description: Minimum holding period required for long-term capital gains basis indexation.
+values:
+  2013-01-01: 1
+metadata:
+  unit: year
+  period: year
+  label: Capital gains basis indexation minimum holding period
+  reference:
+    - title: Yale Budget Lab, Indexing Capital Gains to Inflation
+      href: https://budgetlab.yale.edu/research/indexing-capital-gains-inflation

policyengine_us/parameters/gov/irs/capital_gains/indexation/purchase_year_threshold.yaml

@@ -0,0 +1,10 @@
+description: Assets must be purchased after this calendar year to qualify for long-term capital gains basis indexation.
+values:
+  2013-01-01: 0
+metadata:
+  unit: year
+  period: year
+  label: Capital gains basis indexation purchase year threshold
+  reference:
+    - title: Yale Budget Lab, Indexing Capital Gains to Inflation
+      href: https://budgetlab.yale.edu/research/indexing-capital-gains-inflation

policyengine_us/reforms/capital_gains_indexation.py

@@ -0,0 +1,44 @@
+from policyengine_us.model_api import *
+from policyengine_core.periods import instant
+
+
+def create_capital_gains_indexation_reform(
+    purchase_year_threshold: int,
+    minimum_holding_period: int = 1,
+    cap_adjustment_to_gain: bool = True,
+):
+    def modify_parameters(parameters):
+        indexation = parameters.gov.irs.capital_gains.indexation
+        start = instant("2026-01-01")
+        stop = instant("2100-12-31")
+        indexation.applies.update(start=start, stop=stop, value=True)
+        indexation.minimum_holding_period.update(
+            start=start, stop=stop, value=minimum_holding_period
+        )
+        indexation.purchase_year_threshold.update(
+            start=start, stop=stop, value=purchase_year_threshold
+        )
+        indexation.cap_adjustment_to_gain.update(
+            start=start, stop=stop, value=cap_adjustment_to_gain
+        )
+        return parameters
+
+    class reform(Reform):
+        def apply(self):
+            self.modify_parameters(modify_parameters)
+
+    return reform
+
+
+capital_gains_indexation_prospective = create_capital_gains_indexation_reform(
+    purchase_year_threshold=2025
+)
+capital_gains_indexation_retrospective = create_capital_gains_indexation_reform(
+    purchase_year_threshold=0
+)
+capital_gains_indexation_retrospective_losses_allowed = (
+    create_capital_gains_indexation_reform(
+        purchase_year_threshold=0,
+        cap_adjustment_to_gain=False,
+    )
+)

policyengine_us/tests/policy/contrib/capital_gains_indexation.yaml

@@ -0,0 +1,123 @@
+- name: Case 1, inactive capital gains basis indexation leaves long-term gains unchanged.
+  period: 2026
+  input:
+    people:
+      person1:
+        long_term_capital_gains_before_response: 5_000
+        long_term_capital_gains_basis: 10_000
+        long_term_capital_gains_years_held: 10
+    tax_units:
+      tax_unit:
+        members: [person1]
+  output:
+    tax_unit_long_term_capital_gains_indexation_adjustment: 0
+    long_term_capital_gains_indexation_adjustment: [0]
+    long_term_capital_gains: [5_000]
+
+- name: Case 2, retrospective indexation applies the no-loss cap.
+  period: 2026
+  reforms: policyengine_us.reforms.capital_gains_indexation.capital_gains_indexation_retrospective
+  input:
+    people:
+      person1:
+        long_term_capital_gains_before_response: 100
+        long_term_capital_gains_basis: 1_000_000
+        long_term_capital_gains_years_held: 10
+    tax_units:
+      tax_unit:
+        members: [person1]
+  output:
+    tax_unit_long_term_capital_gains_indexation_adjustment: 100
+    long_term_capital_gains_indexation_adjustment: [100]
+    long_term_capital_gains: [0]
+
+- name: Case 3, prospective indexation excludes assets purchased before 2026.
+  period: 2026
+  reforms: policyengine_us.reforms.capital_gains_indexation.capital_gains_indexation_prospective
+  input:
+    people:
+      person1:
+        long_term_capital_gains_before_response: 5_000
+        long_term_capital_gains_basis: 10_000
+        long_term_capital_gains_years_held: 10
+    tax_units:
+      tax_unit:
+        members: [person1]
+  output:
+    tax_unit_long_term_capital_gains_indexation_adjustment: 0
+    long_term_capital_gains_indexation_adjustment: [0]
+    long_term_capital_gains: [5_000]
+
+- name: Case 4, prospective indexation applies to assets purchased after 2025.
+  period: 2027
+  reforms: policyengine_us.reforms.capital_gains_indexation.capital_gains_indexation_prospective
+  input:
+    people:
+      person1:
+        long_term_capital_gains_before_response: 100
+        long_term_capital_gains_basis: 1_000_000
+        long_term_capital_gains_years_held: 1.1
+    tax_units:
+      tax_unit:
+        members: [person1]
+  output:
+    tax_unit_long_term_capital_gains_indexation_adjustment: 100
+    long_term_capital_gains_indexation_adjustment: [100]
+    long_term_capital_gains: [0]
+
+- name: Case 5, tax-unit indexation allocates a capped mixed-spouse adjustment to the gain holder.
+  period: 2026
+  reforms: policyengine_us.reforms.capital_gains_indexation.capital_gains_indexation_retrospective
+  input:
+    people:
+      person1:
+        long_term_capital_gains_before_response: 500
+        long_term_capital_gains_basis: 800_000
+        long_term_capital_gains_years_held: 10
+      person2:
+        long_term_capital_gains_before_response: -200
+        long_term_capital_gains_basis: 200_000
+        long_term_capital_gains_years_held: 10
+    tax_units:
+      tax_unit:
+        members: [person1, person2]
+  output:
+    tax_unit_long_term_capital_gains_indexation_adjustment: 300
+    long_term_capital_gains_indexation_adjustment: [300, 0]
+    long_term_capital_gains: [200, -200]
+    net_capital_gains: 0
+
+- name: Case 6, no-loss cap prevents larger net long-term losses.
+  period: 2026
+  reforms: policyengine_us.reforms.capital_gains_indexation.capital_gains_indexation_retrospective
+  input:
+    people:
+      person1:
+        long_term_capital_gains_before_response: -500
+        long_term_capital_gains_basis: 1_000_000
+        long_term_capital_gains_years_held: 10
+    tax_units:
+      tax_unit:
+        members: [person1]
+  output:
+    tax_unit_long_term_capital_gains_indexation_adjustment: 0
+    long_term_capital_gains_indexation_adjustment: [0]
+    long_term_capital_gains: [-500]
+
+- name: Case 7, losses-allowed benchmark can increase net long-term losses.
+  period: 2026
+  absolute_error_margin: 0.01
+  reforms: policyengine_us.reforms.capital_gains_indexation.capital_gains_indexation_retrospective_losses_allowed
+  input:
+    people:
+      person1:
+        long_term_capital_gains_before_response: -500
+        long_term_capital_gains_basis: 1_000_000
+        long_term_capital_gains_years_held: 10
+    tax_units:
+      tax_unit:
+        members: [person1]
+  output:
+    tax_unit_long_term_capital_gains_indexation_adjustment: 334_063.66
+    long_term_capital_gains_indexation_adjustment: [334_063.66]
+    long_term_capital_gains: [-334_563.66]

policyengine_us/tests/test_system_import.py

@@ -82,3 +82,14 @@ def test_computed_default_uprated_variables_have_microdata_overrides():
             missing_overrides.append(name)
 
     assert missing_overrides == []
+
+
+def test_capital_gains_indexation_inputs_have_expected_uprating():
+    from policyengine_us.system import CountryTaxBenefitSystem
+
+    system = CountryTaxBenefitSystem()
+    assert (
+        system.variables["long_term_capital_gains_basis"].uprating
+        == "calibration.gov.irs.soi.long_term_capital_gains"
+    )
+    assert system.variables["long_term_capital_gains_years_held"].uprating is None

policyengine_us/tests/variables/household/income/person/capital_gains/long_term_capital_gains_basis.yaml

@@ -0,0 +1,18 @@
+- name: Long-term capital gains basis is a person-level input
+  period: 2026
+  input:
+    people:
+      person1:
+        long_term_capital_gains_basis: 80_000
+      person2:
+        long_term_capital_gains_basis: 20_000
+  output:
+    long_term_capital_gains_basis: [80_000, 20_000]
+
+- name: Long-term capital gains basis defaults to zero
+  period: 2026
+  input:
+    people:
+      person1: {}
+  output:
+    long_term_capital_gains_basis: [0]

policyengine_us/tests/variables/household/income/person/capital_gains/long_term_capital_gains_years_held.yaml

@@ -0,0 +1,18 @@
+- name: Long-term capital gains years held is a person-level input
+  period: 2026
+  input:
+    people:
+      person1:
+        long_term_capital_gains_years_held: 8.5
+      person2:
+        long_term_capital_gains_years_held: 21.25
+  output:
+    long_term_capital_gains_years_held: [8.5, 21.25]
+
+- name: Long-term capital gains years held defaults to zero
+  period: 2026
+  input:
+    people:
+      person1: {}
+  output:
+    long_term_capital_gains_years_held: [0]

policyengine_us/variables/gov/irs/tax/federal_income/capital_gains/tax_unit_long_term_capital_gains_indexation_adjustment.py

@@ -0,0 +1,79 @@
+from policyengine_us.model_api import *
+
+
+FIRST_CPI_U_YEAR = 1913
+
+
+def capital_gains_indexation_price_level(parameters, year, transition_year):
+    if year <= transition_year:
+        return parameters(f"{year}-01-01").gov.bls.cpi.cpi_u
+
+    cpi_u_transition = parameters(f"{transition_year}-01-01").gov.bls.cpi.cpi_u
+    chained_cpi_transition = parameters(f"{transition_year}-01-01").gov.bls.cpi.c_cpi_u
+    chained_cpi_year = parameters(f"{year}-01-01").gov.bls.cpi.c_cpi_u
+    return cpi_u_transition * chained_cpi_year / chained_cpi_transition
+
+
+class tax_unit_long_term_capital_gains_indexation_adjustment(Variable):
+    value_type = float
+    entity = TaxUnit
+    label = "tax unit long-term capital gains basis indexation adjustment"
+    unit = USD
+    documentation = (
+        "Reduction in taxable long-term capital gains from indexing basis to inflation."
+    )
+    definition_period = YEAR
+
+    def formula(tax_unit, period, parameters):
+        p = parameters(period).gov.irs.capital_gains.indexation
+        if not p.applies:
+            return np.zeros(tax_unit.count)
+
+        person = tax_unit.members
+        year = period.start.year
+        gains = add(tax_unit, period, ["long_term_capital_gains_before_response"])
+        basis = add(tax_unit, period, ["long_term_capital_gains_basis"])
+
+        person_gains = person("long_term_capital_gains_before_response", period)
+        person_years_held = person("long_term_capital_gains_years_held", period)
+        person_weights = abs(person_gains)
+        weight_sum = tax_unit.sum(person_weights)
+        weighted_years_held = tax_unit.sum(person_years_held * person_weights)
+        years_held = np.divide(
+            weighted_years_held,
+            weight_sum,
+            out=np.zeros_like(weighted_years_held),
+            where=weight_sum != 0,
+        )
+
+        rounded_years_held = np.rint(np.nan_to_num(years_held)).astype(int)
+        acquisition_year = year - rounded_years_held
+
+        transition_year = p.chained_cpi_transition_year
+        current_price_level = capital_gains_indexation_price_level(
+            parameters, year, transition_year
+        )
+        indexation_ratio = np.ones(tax_unit.count)
+        for purchase_year in np.unique(acquisition_year):
+            if purchase_year < FIRST_CPI_U_YEAR or purchase_year > year:
+                continue
+            purchase_price_level = capital_gains_indexation_price_level(
+                parameters, int(purchase_year), transition_year
+            )
+            indexation_ratio = where(
+                acquisition_year == purchase_year,
+                current_price_level / purchase_price_level,
+                indexation_ratio,
+            )
+
+        eligible = (
+            (basis > 0)
+            & (years_held > p.minimum_holding_period)
+            & (acquisition_year > p.purchase_year_threshold)
+        )
+        adjustment = basis * max_(0, indexation_ratio - 1)
+
+        if p.cap_adjustment_to_gain:
+            adjustment = where(gains > 0, min_(adjustment, gains), 0)
+
+        return where(eligible, adjustment, 0)

policyengine_us/variables/household/income/person/capital_gains/long_term_capital_gains.py

@@ -12,7 +12,11 @@ class long_term_capital_gains(Variable):
         title="26 U.S. Code § 1222(3)",
         href="https://www.law.cornell.edu/uscode/text/26/1222#3",
     )
-    adds = [
-        "long_term_capital_gains_before_response",
-        "capital_gains_behavioral_response",
-    ]
+
+    def formula(person, period, parameters):
+        gains = person("long_term_capital_gains_before_response", period)
+        response = person("capital_gains_behavioral_response", period)
+        indexation_adjustment = person(
+            "long_term_capital_gains_indexation_adjustment", period
+        )
+        return gains + response - indexation_adjustment

policyengine_us/variables/household/income/person/capital_gains/long_term_capital_gains_basis.py

@@ -0,0 +1,14 @@
+from policyengine_us.model_api import *
+
+
+class long_term_capital_gains_basis(Variable):
+    value_type = float
+    entity = Person
+    label = "long-term capital gains basis"
+    unit = USD
+    documentation = (
+        "Cost basis associated with realized long-term capital gains, "
+        "stored for capital-gains basis indexation analysis."
+    )
+    definition_period = YEAR
+    uprating = "calibration.gov.irs.soi.long_term_capital_gains"