CARE Seminar: Lucy Msall, NBER Posdoc/Chicago Law

Speaker

Lucy Msall, NBER Posdoc/Chicago Law

Title

"Never-Realized Capital Gains"

Abstract

Appreciated assets are subject to capital gains tax when sold by their original owner. Yet under policies of “stepped-up basis at inheritance”, many countries forgive this latent tax obligation if the asset is instead transferred, unsold, to the owner’s heir. In the first part of this paper, we create novel data on capital gains in Norway and show that large fractions of top household wealth are in the form of capital gains with latent (i.e., unrealized) capital gains tax liability. Furthermore, much of this capital gain is never taxed: Norway’s stepped-up basis policy exempted around $300 million of capital gains in stock and real estate from taxation each year (an amount equal to 19-25% of yearly taxable gains in stock and real estate). In the second part of the paper, we study investor responses to a reform that moved Norway from a system of stepped-up basis to a system in which heirs inherit their predecessor’s latent capital gains tax obligation when they inherit appreciated assets. Using a difference-in-difference empirical strategy exploiting cross-sectional variation in investors’ unrealized capital gain prior to the reform, we estimate that the removal of step-up precipitated large increases in taxable realizations among highly-appreciated investors. The removal of step-up also affected the composition of inheritance: inherited assets had a lower ratio of capital gain to value following the reform. Overall, we conclude that stepped-up basis has a large effect on investors’ decision to sell appreciated assets and disproportionately benefits the very wealthy.

Biography

My research interests are in Public Economics (especially Taxation), Household Finance & Innovation. I completed my PhD in Economics at the University of Chicago’s Booth School of Business in 2025.

Find my CV here.

I am spending the 2025-2026 academic year visiting the National Bureau of Economic Research as a Post-doctoral Fellow in Wealth and Income Inequality.

In 2026, I will join the faculty of the University of Chicago Law School as an Assistant Professor.