LC-04 · Tax
Step-up in basis at death
Unrealized gains can vanish
In ordinary words
If you buy stock at $10 and die when it is worth $100, your heirs generally take a new tax basis of $100. The $90 gain is never taxed as income.
Why people call it a crime
Wage earners pay tax on every paycheck. A large unrealized fortune can pass to children with the income tax on the gain wiped clean. People call that a legal escape hatch for inherited wealth.
A scene, not a hypothetical statute
A founder never sells. The gain sits on paper for forty years. On the day of death the scoreboard resets for the children. The IRS does not send a bill for the income tax on that climb.
In legal terms
IRC § 1014 sets the basis of inherited property at fair market value at the decedent’s death in most cases. The estate tax under IRC § 2001 may apply to very large estates, but the income tax on the unrealized appreciation is generally forgiven. Community-property and alternate-valuation rules create variations.
Congress chose to reset basis at death, partly to avoid forcing heirs to reconstruct a decedent’s records, and paired that choice with a separate estate tax that has a high exemption.
IRC § 1014; IRC § 691; IRC § 2001.
Where it stops being legal
Basis step-up does not bless fraud, false date-of-death values, or income in respect of a decedent under § 691, which does not get a step-up. Estate-tax evasion is a crime.