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What Assets Get a Step-Up in Basis at Death?

What Assets Get a Step-Up in Basis at Death?

With the death of a loved one, one question we often get is, “What assets are entitled to a step-up in basis and what assets aren’t entitled to a step-up in basis at death?” To define what we mean by step-up in basis, sometimes referred to as stepped-up basis, here is an example:

Your mother purchased 100 shares of XYZ company at $10 per share in 1950, costing her $1,000, which is her “basis.” She holds the shares without selling until she passes away in 2022. The share price is $1,000 per share at her date of death. 

Despite the fact that she has a significant gain of $99,000 in this example, the basis “steps up” on the date of death to the share price on that date – or $100,000. If the beneficiary of this stock decides to sell it a few months later, their basis is $100,000 and the gain or loss is simply the value of the shares sold minus the basis. For example, if they were sold at a value of $110,000, they would owe tax on $10,000 of capital gains (and in this case, short-term capital gains).

Examples of Assets That Step-Up in Basis

  • Individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs) held in taxable accounts.
  • Real estate – this includes many forms, such as multi-family residences, primary residences, vacation homes, and office buildings. 
  • Businesses and the equipment in the business.
  • Art, collectibles, home furnishings – such as antiques that may have increased in value.
  • Cryptocurrencies.
  • Non-fungible tokens, or NFTs.

Examples of Assets That Do NOT Step-Up in Basis

  • Individual retirement accounts, including IRAs and Roth IRAs.
  • 401(k), 403(b), 457 employer-sponsored retirement plans and pensions.
  • Real estate that was gifted prior to inheritance.
  • Tax-deferred annuities.

We encourage our clients to seek out the counsel of a qualified estate planning attorney to plan out their wishes and assure that they are making good choices regarding future taxation of their assets and avoiding unintended consequences of their actions.

– Clint Walkner

Note: We are not CPAs. Please consult a tax professional if you have any tax questions specific to your own personal situation.

Does Cryptocurrency Get a Step-Up in Basis Upon Death?

Does Cryptocurrency Get a Step-Up in Basis Upon Death?

With the rise of virtual currency – such as Bitcoin or Ethereum – there are many investors that have significant unrealized gains embedded in their holdings. But when someone passes away, their holdings may go through a step-up in basis (depending on what it is they’re holding and how it’s held, e.g. brokerage account, Roth IRA, etc.). Effectively, the value at the date of death becomes the new cost basis for that asset. This may benefit the beneficiary greatly since there are no longer any unrealized gains to recognize at the date of death.

Because of the novelty of virtual currencies, many investors who have cryptocurrencies may be wondering where those fall in terms of a step-up in basis. Here’s your answer.  

Cryptocurrencies are treated as property in the eyes of the IRS. One bulletin to read is IRS Notice 2014-21. Due to the tax treatment as property, the step-up in basis provision does apply to cryptocurrency, including Bitcoin, Ethereum, and yes, even Shiba Inu

However, there is one important exception to this. If crypto assets are held inside of an individual retirement account such as a Roth IRA or IRA, the step-up in basis does not apply, as these assets are not eligible for the step-up in basis.

You can read more about other assets that step up in basis in our general overview of step-up in basis here.

– Clint Walkner

Disclosure: We are not CPAs. Please consult a tax professional if you have any tax questions specific to your own personal situation.