&gt; However, individuals who buy and hold investments, including those who invest in index funds that trade infrequently<p>Wait, how is that possible?  Are the underlying trades that make up the index not taxed?  Do the funds receive some sort exemption?  If so, how do I become an entity like that?<p>Seems to me that as an &quot;average&quot; investor I&#x27;m going to get taxed 3 times now.  The underlying index trades, my own entry and exit from the index and on the gains from the trade (hopefully).  Wouldn&#x27;t it be simpler to just tax the gains as we do now at a higher rate?<p>[Later] On second thought this is even worse for folks like me (whether I count as &quot;average&quot; or not I don&#x27;t know).  Most of my trading portfolio exists in the form of index funds in tax deferred accounts.  My long hold of those index funds now acts as a back door for lots of taxation that is less obvious.