The problem with this is that the "capital" in many of these cases is a family business. You have some auto shop and the company owns the shop with its land and equipment, but it's all needed to continue operating the business, so you can't sell it without shutting down. Meanwhile the business only makes enough to pay the salaries of the owner-employees, who would likewise shut down the business if they weren't getting paid. So the business is worth more than the taxes it owes, but the only way to pay them would be to liquidate the assets and cease operations. The government sensibly prefers to allow the business to continue operating and collect the taxes later.

But then that creates another perverse incentive. You've just graduated medical school when you inherit an auto shop. If you sell the shop and use the money to found a medical practice (or just invest it in a major ETF and go work for a hospital), you immediately lose $250K to taxes. If you continue operating the auto shop, you don't, which gives it an advantage it shouldn't have and you end up with a doctor running an auto shop. It creates too much of a preference for not selling the shop. So to solve that we reset the basis. But how is that better than leaving its basis where it is but allowing it to be sold and the low tax basis transferred to the medical practice or the stock purchase?

(edit: basis isn't set to zero, taxable gain is zeroed out by setting basis to FMV)

> how is that better than leaving its basis where it is but allowing it to be sold and the low tax basis transferred [to another investment]?

IMO, that is better from a record-keeping and audit perspective. It is often not possible to determine when or at what basis an asset was acquired, particularly when the original purchaser can no longer be interviewed. It is not a particularly exploitable loophole as you have to die to "take advantage" of it.