Capital Gains

The SEC has suggested adjusting the amount of one's investment in Bernie Madoff fraud to allow older investors to get a boost in the "cash in" of their account to count not just cash they actually invested but what the cash would have grown to had it been growing along with inflation.

This is an excellent idea that should be utilized more broadly. If a hypothetical security has stayed at $100 from 1998 through 2008 and then shot up to $1000 in 2009, an investor who holds it from 1998 through 2009 has not made the same return as someone who held it since 2008 but both will be taxed the same amount. Of course, the logistics of adjusting basis every year is daunting (although it could easily be done by brokerage firms for investments held in brokerage accounts). Also, adjustments for inflation is probably inappropriate. Some risk free rate of return should be used, perhaps based on some a term treasury rate (maybe the yield on 90-day day treasuries at the midpoint of each quarter). Any amount above their basis would be treated as what it is: ordinary income, above the risk free return they are entitled to on their asset.