Crypto Inheritance: How the Step-Up in Basis Works and Its Limits

There is one date on which every dollar of gain on a crypto holding can stop being taxable: the date the holder dies. That isn’t a loophole or a product anyone sold you. It is Section 1014 of the US tax code, and the video argues it is one of the least understood rules in crypto.

There is also a version of this plan that doesn’t work, and the video says it is the one many people get sold. A short IRS ruling from 2023 names it. Here is how the rule works, why gifting can backfire, and the limits worth knowing. The video is clear that it is education, not tax advice, and that everyone’s situation needs a licensed professional.

What is the step-up in basis?

When someone dies, the assets that pass from them get a new cost basis in the hands of whoever inherits them. The new basis isn’t the price originally paid. It’s the fair market value on the date of death, in the statute’s words “the fair market value of the property at the date of the decedent’s death.”

The gain built up over the holding period isn’t taxed, deferred or rolled forward. For tax purposes, it disappears.

Does it apply to crypto?

Yes, according to the video. The IRS states on its own website that “for United States tax purposes, digital assets are considered property, not currency.” Section 1014 is a rule about property, and it doesn’t distinguish between a rental house, a share of stock or a coin in a wallet you control.

How much tax can it save? A worked example

The video uses this example:

	Sell it yourself	Heirs inherit, then sell
Coins	100,000	100,000
Cost basis	$0.30 each ($30,000)	Reset to $2.60 each ($260,000)
Value when sold	$2.60 each ($260,000)	$260,000
Taxable gain	$230,000	$0
Federal tax	About $54,740	$0

The $54,740 figure assumes a 20% long-term capital gains rate ($46,000) plus the 3.8% net investment income tax. If the heirs sell the following week at the same price, the taxable gain is zero. Same coins, same price. The difference is who holds them and on what date.

Why can gifting crypto early backfire?

Gifts keep the original basis. The common instinct with a large gain is to move it to the kids early to get it out of your name. Section 1015, which covers gifts, says the opposite of Section 1014: “the basis shall be the same as it would be in the hands of the donor.”

So if the coins in the example are given away during the holder’s lifetime, the 30-cent basis goes with them. The children then hold the gain and the future tax bill. The video calls generosity in the wrong order the most common mistake in this area, because it can cost the family the whole benefit.

Doesn’t the estate get taxed instead?

For most people, no. The video gives these 2026 figures:

• Basic exclusion amount (federal estate tax): $15 million per person
• Annual gift exclusion: $19,000

Below $15 million, there is no federal estate tax, and the basis still resets. The video’s point is that most holders aren’t trading one tax for another.

Which IRS ruling closed the trust strategy?

Revenue Ruling 2023-2, issued in March 2023. Section 1014(a) provides the reset, but Section 1014(b) lists seven types of property that count as passing from the decedent. If an asset isn’t one of those seven, the reset never applies.

The ruling asked whether assets in an irrevocable trust get the reset when the person who created the trust dies, if those assets aren’t in their estate. The IRS said no: the basis “is not adjusted to the fair market value on the date of A’s death,” because the asset doesn’t fall within any of the seven types listed in Section 1014(b).

The structures many people were sold specifically to move assets out of their estate are the ones that lose the reset. Out of the estate and a stepped-up basis can’t be had together. The video contrasts this with a revocable living trust, which stays in the estate, so the reset applies.

What are the limits of the step-up?

The video names three:

1. Retirement accounts don’t work this way. A traditional IRA or 401(k) gets no basis reset. It counts as income in respect of a decedent, and heirs pay ordinary income tax when they take money out.
2. State laws vary. In community property states, the treatment of jointly held assets is different, and generally better.
3. It’s not tax advice. The host says he is not a tax attorney, and the information comes from IRS.gov and the statute. Anyone’s own holdings need someone licensed in their state.

Can your heirs actually open the wallet?

This is the part the tax code can’t fix. The step-up assumes heirs can get the asset. A basis adjustment on a wallet nobody can open applies to money that’s effectively gone. The tax code doesn’t recover a seed phrase.

Most inherited assets have an institution behind them that heirs can call. Self-custodied crypto is different: perfect paperwork and lost money can coexist. Many holders follow “not your keys, not your crypto” and store their keys somewhere private that even a spouse or sibling doesn’t know about.

The video’s order of priorities:

1. First job: make sure someone other than you can find and open your crypto if something happens to you. That includes knowing where the seed phrase is stored.
2. Second job: the tax planning.

The video ends with a yes-or-no question for viewers: does anyone other than you know how to get into your wallet?

What to check next

Revenue Ruling 2023-2 is four paragraphs long and free on IRS.gov, and Sections 1014 and 1015 are public. Before signing any trust or estate document, the video suggests knowing these basics so you know what to ask a tax professional. Check whether any trust you own is revocable or irrevocable, list where each holding sits and who can access it, and take both questions to someone licensed where you live.