# Step-Up in Basis **Step-up in basis** is the rule in the [[Internal Revenue Code]] that resets the cost basis of an inherited asset to its fair-market value on the date of the owner's death, rather than carrying over the deceased's original purchase price. Because capital gains tax is owed only on the appreciation *above* basis, resetting the basis at death erases all the unrealized capital gain that accrued during the owner's lifetime. An heir who immediately sells the asset owes no capital gains tax at all; an heir who holds it pays tax only on appreciation occurring after the inheritance. ## A worked example Suppose a person bought stock for $1 million decades ago, and it is worth $11 million at their death. Had they sold it while alive, they would have owed capital gains tax on the $10 million of appreciation. Instead, at death the basis "steps up" to $11 million, and the $10 million of gain permanently escapes income taxation. Combined with the relatively high [[Estate Tax]] exemption, very large amounts of appreciated wealth can pass between generations having never been subject to capital gains tax — what critics call the "Angel of Death loophole." ## Why it matters for the knowledge base Step-up in basis is one of the most important mechanisms preserving and compounding **dynastic wealth**, and therefore a recurring node in the KB's coverage of inequality, the [[Anti-Tax Movement]], and the politics of inherited fortunes: - **The buy-borrow-die strategy.** The wealthiest taxpayers can avoid realizing gains during their lifetimes (instead borrowing against appreciated assets to fund consumption), then pass those assets to heirs with a stepped-up basis, so the gains are never taxed at all. Step-up is the final, essential step that makes the strategy work. - **A perennial reform target that survives.** Proposals to repeal or limit step-up (for example, taxing unrealized gains at death above a threshold) recur in Democratic tax plans — President Biden proposed curtailing it — but have repeatedly failed in Congress, illustrating the political durability of provisions that benefit concentrated wealth. - **Defense and critique.** Defenders argue it prevents double taxation (since estates may face the [[Estate Tax]]) and spares heirs the impossible task of reconstructing the basis of long-held or inherited assets; critics counter that the estate-tax exemption is now so high that most stepped-up gains face neither capital gains nor estate tax. ## See Also - [[Income Tax]] — the broader system within which capital gains sit - [[Estate Tax]] — the companion tax on transfers at death - [[Anti-Tax Movement]] — the coalition defending such provisions - [[Internal Revenue Code]] — where the rule lives - [[Tax Code Hub]] — folder reader map