Step-up in basis is one of the most valuable — and most misunderstood — tax provisions in the U.S. tax code. It can save your heirs tens or even hundreds of thousands of dollars in capital gains taxes, but only if they understand how it works and document things properly.
Let's break it down in plain English.
What Is "Basis" in the First Place?
Your "basis" in an asset is essentially what you paid for it. When you sell that asset, you pay capital gains tax on the difference between what you paid (your basis) and what you sold it for.
Simple example: You buy Apple stock for $10,000. Years later, you sell it for $150,000. Your capital gain is $140,000, and you owe taxes on that amount — potentially at a rate of 15-20% for long-term capital gains, meaning a tax bill of $21,000 to $28,000.
What Changes When You Inherit Instead of Sell
Here's where step-up in basis transforms the picture.
If instead of selling that Apple stock, you hold it until you die, something remarkable happens for your heirs. The cost basis of the stock "steps up" to the fair market value at the date of your death.
Same example, different outcome: You bought Apple stock for $10,000. At your death, it's worth $150,000. Your heir inherits the stock with a new basis of $150,000 — not your original $10,000.
If your heir sells that stock the next week for $150,000, their capital gain is $0. No capital gains tax. The $140,000 in appreciation during your lifetime is never taxed.
That's up to $28,000 in tax savings, erased completely.
How It Works Technically
The step-up in basis is governed by Internal Revenue Code Section 1014. Here's what you need to know:
The valuation date is generally the date of death. However, the executor of the estate can elect to use an "alternate valuation date" six months after death if it results in a lower estate value (this is typically used when asset values have declined).
The fair market value is determined by the closing price of publicly traded securities on the date of death, or through appraisals for real estate and other non-publicly traded assets.
Community property states get an extra benefit. In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), both halves of community property get a step-up when one spouse dies — not just the deceased spouse's half.
What Qualifies for Step-Up in Basis
Most assets that appreciate in value qualify:
- **Stocks and bonds** held in taxable brokerage accounts
- **Real estate** including primary residences, rental properties, and land
- **Cryptocurrency** held on exchanges or in self-custody (yes, crypto qualifies — more on this below)
- **Business interests** including LLC membership interests and S-corp shares
- **Collectibles** such as art, jewelry, and antiques
- **Mutual funds and ETFs** in taxable accounts
What Does NOT Qualify
Several important asset types do not receive a step-up in basis:
- **Traditional IRAs and 401(k)s**: These are taxed as ordinary income when withdrawn, regardless of when the original contributions were made. There's no step-up because the money was never taxed going in (it was tax-deferred). See our guide on [inherited IRA rules](/blog/inherited-ira-rules-2024) for details.
- **Roth IRAs**: These don't need a step-up because qualified distributions are already tax-free.
- **Annuities**: Generally do not receive a step-up; gains are taxed as ordinary income to the beneficiary.
- **Assets gifted before death**: If you give an asset away while alive, the recipient gets your original basis (called "carryover basis"), not a step-up. This is a critical planning consideration.
- **Income in Respect of a Decedent (IRD)**: Items like unpaid salary, deferred compensation, and IRA distributions do not get a step-up.
The Apple Stock Example in Full
Let's walk through a comprehensive example:
The situation: Sarah bought 1,000 shares of Apple (AAPL) in 2010 for $10 per share ($10,000 total investment). She dies in 2026 when Apple is trading at $150 per share.
Without step-up (if Sarah had sold before death): - Sale proceeds: $150,000 - Original basis: $10,000 - Capital gain: $140,000 - Federal tax (20% rate): $28,000 - Net Investment Income Tax (3.8%): $5,320 - Total federal tax: $33,320
With step-up (heir inherits and sells): - Sale proceeds: $150,000 - Stepped-up basis: $150,000 - Capital gain: $0 - Total federal tax: $0
The step-up saved Sarah's heir $33,320 in federal taxes alone, not counting any state capital gains taxes.
Crypto and Step-Up in Basis
Cryptocurrency is treated as property by the IRS, which means inherited crypto does qualify for a step-up in basis. This is particularly significant given the massive appreciation many crypto assets have experienced.
Example: John bought 10 Bitcoin at $1,000 each ($10,000 total) in 2015. At his death in 2026, Bitcoin is trading at $65,000 each. His heir inherits the 10 Bitcoin with a stepped-up basis of $650,000.
If the heir sells immediately, no capital gains tax is owed on the $640,000 in appreciation. Without the step-up, the tax bill could exceed $120,000.
However, there's a critical catch with crypto: to claim the step-up, the executor needs to be able to access the crypto and document its value as of the date of death. If crypto is locked in a wallet that nobody can access, the step-up is meaningless. This is why documenting your crypto holdings with a tool like Passed Plan is so important — your executor needs to know what exists and how to access it to properly value the estate and claim the step-up.
Step-Up in Basis Planning Strategies
Understanding step-up opens up several planning strategies:
Hold Appreciated Assets
If you have highly appreciated assets you were considering selling, it may be worth holding them until death so your heirs get the step-up. This is sometimes called the "buy, borrow, die" strategy.
Don't Gift Appreciated Assets
Gifting appreciated assets during your lifetime means the recipient gets your original (low) basis. They'd owe capital gains tax on all the appreciation when they sell. If possible, it's often better to hold the asset and let it pass through your estate with the step-up.
Consider Selling Depreciated Assets
The step-up works both ways. If an asset has lost value, the basis steps down to the lower fair market value at death. In this case, it's better to sell the asset during your lifetime to realize the capital loss, which can offset other gains and up to $3,000 of ordinary income per year.
Document Everything
Your executor needs accurate records of: - What assets the deceased owned - The fair market value of each asset on the date of death - The original cost basis (in case the step-up is challenged or doesn't apply)
Passed Plan can help organize this information securely, ensuring your executor has what they need to properly claim the step-up for every qualifying asset.
Will Step-Up in Basis Go Away?
Step-up in basis has survived multiple legislative challenges. Various administrations have proposed eliminating or limiting it, but it remains intact as of 2026. The provision is widely supported across political lines because it prevents double taxation (assets subject to estate tax shouldn't also face capital gains tax, the argument goes).
That said, tax law changes, and there's no guarantee step-up will exist in its current form forever. The best approach is to plan with current law while staying flexible.
The Bottom Line
Step-up in basis is a powerful tax tool that can save your heirs significant money — but only if your estate is properly organized. Your executor needs to know what assets exist, what they're worth, and how to access them.
Start documenting your assets today. Your heirs' tax bills depend on it.
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