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Crypto Law/Level VII · Loopholes worth understanding/7.1 Legal planning/Lesson 5

Step-up in basis at death

How US law resets the basis of coins held at death, how spouses, joint ownership and trusts change the result, and why the rule is a planning fixture and a political target.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Hold appreciated coins until death: under 26 U.S.C. §1014 heirs take date-of-death value as basis, so lifetime gain is never income-taxed and §1223(9) makes any sale long-term; the 2026 federal estate exclusion is $15,000,000, and some states tax estates lower.
  2. Hold coins in a revocable living trust, not an irrevocable grantor trust: §1014(b)(2) keeps the step-up for trusts revocable until death, while Revenue Ruling 2023-2 denies it for irrevocable grantor trusts kept outside the estate.
  3. In community property states the survivor’s half also steps up under §1014(b)(6), so the whole asset resets; elsewhere spouses’ joint survivorship property generally resets only the deceased half under §2040(b), so title and residence matter.
  4. Elect portability of the unused estate-tax exclusion by filing an estate tax return; Rev. Proc. 2022-32 lets estates not otherwise required to file do so up to the fifth anniversary of death, a cheap filing that can shelter the survivor’s estate.
  5. Sell coins below basis during life, because §1014 resets losses downward too, and note §1014(e) denies the step-up for appreciated property given within a year before death that returns to the giver; leave heirs access instructions, never the seed phrase in a will.

Materials26 U.S.C. §1014 and §2032 on law.cornell.eduIRS Revenue Ruling 2023-2 on irrevocable grantor trustsRev. Proc. 2022-32 on late portability electionsA list of your holdings showing which are in your own name, held jointly or held in a trust

Wonder

  1. Why does a coin bought for $1,000 and inherited at $100,000 carry almost no income tax?
  2. Do both spouses’ halves get a new basis when one dies?
  3. Does putting coins in a trust keep the step-up?

Explore

  1. Under 26 U.S.C. §1014, property acquired from a person who has died generally takes a basis equal to its fair market value at the date of death. Lesson 2.1.5 introduced the rule; here the focus is planning. The executor can instead elect an alternate valuation date six months after death under §2032, but only if the election lowers both the value of the gross estate and the estate tax, and it is made on the estate tax return and is irrevocable. The reset works in both directions: coins worth less than their cost at death take the lower value, and the unrealized loss is lost.
  2. Planners compare this with a lifetime gift, which carries the giver’s old basis to the recipient (lesson 7.1.3). Gain that builds up during life on coins held until death is never subject to income tax, and an heir who sells within a year is still treated as having held long-term under §1223(9). What remains is the federal estate tax, whose basic exclusion is $15,000,000 for 2026 under §2010(c)(3), indexed for inflation after 2026, plus any state estate or inheritance tax. Holding to keep the step-up also means keeping full price risk on a volatile asset for an unknown length of time.
  3. Spouses get different results depending on state property law. Under §1014(b)(6), in a community property state the surviving spouse’s half of community property also takes a new basis, provided at least half of the community interest was included in the deceased spouse’s gross estate, so the whole asset can be reset. In other states, property owned jointly by spouses with right of survivorship is a ‘qualified joint interest’, and §2040(b) includes only half of its value in the estate, so generally only that half is stepped up. Where a couple lives, and how the coins are titled, changes the heirs’ basis.
  4. Trusts can keep or lose the step-up. Section 1014(b)(2) covers property placed during life in a trust the person could revoke at all times before death, so coins in an ordinary revocable living trust generally get the new basis. Revenue Ruling 2023-2 addressed the opposite case: assets given to an irrevocable trust that is a grantor trust for income tax but is not included in the grantor’s estate do not get a basis adjustment at death, because they were not acquired from a decedent within §1014(b). Section 1014(e) separately blocks the step-up for appreciated property given to someone who dies within a year and returns to the giver (lesson 2.1.5).
  5. For married couples the estate tax side has its own deadline. Under §2010(c)(5)(A), a surviving spouse can use the unused exclusion of the first spouse to die, called portability, only if the executor files an estate tax return that elects it. Rev. Proc. 2022-32 lets estates that were not otherwise required to file make that election late, up to the fifth anniversary of death. Crypto adds practical problems: heirs need access to keys or accounts, and the date-of-death value needs a record, a question covered in lesson 9.1.5. The basis reset exists in law even when the coins are hard to reach.
  6. The rule is a recurring target. Treasury’s General Explanations of the FY2025 revenue proposals, published in March 2024, proposed treating transfers of appreciated property by gift or on death as realization events, which would tax the built-up gain at that point; Congress did not enact it, and as of October 2026 §1014 still provides the date-of-death basis. A practical check: list each holding with its basis, today’s value and how it is titled, and note which would reset at death and which are in a trust. This lesson explains the rules; it does not recommend holding, selling or any estate arrangement, which an estate attorney can review.

Key facts

  • Under 26 U.S.C. §1014(a), the basis of property acquired from a decedent is generally its fair market value at the date of death, or at an alternate valuation date elected under §2032.
  • An alternate valuation election under §2032(c) is allowed only if it decreases both the gross estate and the estate tax.
  • Under §1014(b)(6), the surviving spouse’s half of community property also takes a new basis if at least half of the community interest was included in the decedent’s gross estate.
  • Revenue Ruling 2023-2 holds that assets in an irrevocable grantor trust not included in the grantor’s gross estate receive no basis adjustment under §1014 at the grantor’s death.
  • Rev. Proc. 2022-32 allows estates not otherwise required to file an estate tax return to elect portability up to the fifth anniversary of the decedent’s death.
  • For 2026, §2010(c)(3) sets the basic exclusion amount for the federal estate tax at $15,000,000, indexed for inflation after 2026.

Exercise nine, six, three, one

9CollectList up to 9 crypto holdings you own or have studied, with basis, current value and how each is held: own name, joint, community property, or trust.
6ClusterSort them into 6 categories: held in your own name, held jointly with a spouse, community property, in a revocable trust, in an irrevocable trust, and ownership unclear.
3DistillReduce the 6 categories to 3 groups: holdings that would likely get a full new basis at death, holdings that would get a partial or no reset, and holdings whose treatment needs review.
1CrystallizeWrite 1 sentence explaining, in your own words, why the same coin can carry its old basis after a gift but a new basis after a death.

Fact check

Dates, figures and claims checked against the published sources listed below.

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