When you inherit cryptocurrency, your cost basis is the fair market value on the date of the decedent's death — not what they originally paid for it. This stepped-up basis rule under §1014 can eliminate years of unrealized gains and dramatically reduce your tax liability when you eventually sell.

Stepped-Up Basis

If a family member bought Bitcoin at $1,000 and held it until death when it was worth $50,000, your cost basis is $50,000. If you sell at $52,000, your taxable gain is $2,000 — not $51,000. The $49,000 of appreciation during the decedent's lifetime is permanently excluded from income tax. This is one of the most powerful tax provisions in the code and it applies fully to cryptocurrency.

Date of Death Valuation

The fair market value is determined as of the date of death unless the estate elects the alternate valuation date (six months after death) under §2032. For cryptocurrency, the date-of-death value is the price on a major exchange at the time of death. If the decedent died on a day when crypto markets were volatile, the specific time of death may matter — document the valuation methodology carefully.

Access Challenges

The unique challenge with inherited crypto is access. If the decedent's private keys, seed phrases, or exchange passwords are unknown, the assets may be inaccessible. Estate planning for crypto requires documenting access credentials in a secure manner — a hardware wallet's seed phrase stored in a safe deposit box or with a trusted attorney. Without access credentials, the crypto exists but cannot be used.

Estate Tax vs. Income Tax

Large crypto holdings may trigger federal estate tax if the total estate exceeds the exemption amount (currently over $13 million per individual). Estate tax and income tax are separate issues. The stepped-up basis eliminates income tax on pre-death appreciation, but the full fair market value of the crypto is included in the estate for estate tax purposes. For estates near or above the exemption threshold, planning is critical.

Professional Guidance

Inherited cryptocurrency involves income tax, estate tax, and often complex access and valuation issues. Attorney Darrin T. Mish advises on the tax implications of inherited crypto and resolves any IRS issues that arise from the estate or the heir's subsequent transactions. Free consultation to evaluate your situation.