Tax Basis of Inherited Bitcoin
What Stepped-Up Basis Means for Inherited Bitcoin
The IRS treats Bitcoin as property under Notice 2014-21, so inherited holdings receive a stepped-up basis equal to fair market value at death under IRC Section 1014. This wipes out capital gains tax on appreciation that occurred during the decedent’s life. If your father acquired 1.2 BTC at $2,800 in March 2017 and that position was worth $78,000 on the date he died in September 2024, your new basis becomes $65,000 per coin. You owe nothing on the $75,200 built-in gain that existed before inheritance. The rule applies whether the Bitcoin sits in a hardware wallet, exchange account, or multisig setup, as long as you can prove date-of-death ownership.
Valuing Bitcoin on the Date of Death
Fair market value is set at the spot price on the date of death, not the high or low of that day. Executors commonly use the closing price from a major exchange such as Coinbase or Kraken at 11:59 p.m. UTC. IRS Publication 550 requires consistent valuation methods across all assets. When death occurs on a weekend or holiday, the prior trading day’s close is acceptable. Keep a timestamped screenshot plus a CSV export from the exchange showing the exact rate. If the estate holds 4.75 BTC valued at $62,400 each, the total stepped-up basis is $296,400. That figure goes straight onto Form 706 if the estate exceeds the filing threshold and onto your inherited records for future sales.
Tracking Cost Basis After Inheritance
Once you receive the Bitcoin, your records start fresh at the stepped-up value. Specific identification remains fully available under the rules in Form 8949 instructions and Revenue Procedure 2019-09. You can designate lots by wallet address, transaction ID, and acquisition date. HIFO accounting is permitted when you maintain contemporaneous records that tie each unit to its date-of-death value. If you later sell 0.8 BTC from a $61,200 stepped-up lot while Bitcoin trades at $94,000, your taxable gain is exactly $26,240. Store the death certificate, appraisal, and exchange statements together so an audit never questions the starting basis.
Selling Inherited Bitcoin and Reporting the Gain
Report every disposition on Form 8949 and Schedule D. The holding period begins the day after death, so sales after one year qualify for long-term rates. Short-term sales still face ordinary income rates up to 37 percent plus the 3.8 percent net investment income tax. Always list the stepped-up basis in column (e) of Form 8949 and the sale price in column (d). If you sell 0.35 BTC inherited at a $59,800 basis for $71,400, enter a $11,600 long-term gain. Keep exchange withdrawal records and wallet transaction hashes to match the exact units sold. The IRS cross-references exchange 1099-B forms, so mismatched numbers trigger notices.
Estate Tax Filing Thresholds and Bitcoin
Bitcoin counts toward the federal estate tax exemption, currently $13.61 million per person in 2024. Estates below that threshold file no Form 706, yet heirs still receive the stepped-up basis. Larger estates must value every satoshi on the date-of-death appraisal and pay tax on amounts above the exemption. State estate taxes in places like Massachusetts and Oregon have lower thresholds and can apply even when federal tax does not. Accurate valuation prevents both underpayment penalties and family disputes over asset division.
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Frequently Asked Questions
Does Bitcoin get a stepped-up basis at death?
Yes. Bitcoin receives a stepped-up basis to fair market value on the date of death under IRC Section 1014 and Notice 2014-21. The original purchase price paid by the decedent disappears for tax purposes. If 2.4 BTC were bought at $3,200 in 2016 and worth $148,000 at death, the heir’s new basis is $61,667 per coin. No capital gains tax applies to the pre-death appreciation. Proper documentation of ownership and valuation is required to claim the step-up.
How is the value determined?
Value is fixed at the closing spot price on the date of death from a reputable exchange. Use 11:59 p.m. UTC from Coinbase Pro or Kraken and keep timestamped records plus CSV exports. IRS Publication 550 accepts this method when applied consistently. For a holding of 1.8 BTC at a $59,200 close, the total basis becomes $106,560. Weekends use the prior trading day. This single number resets the tax basis for every heir.
What if there's no record of original cost?
Missing original cost records do not block the step-up. Heirs start with the date-of-death fair market value regardless of the decedent’s purchase price. Document ownership through wallet addresses, exchange statements, and the death certificate. When selling later, report the stepped-up amount on Form 8949. Maintain these records indefinitely because future audits can reach back many years. Specific identification with HIFO remains available using the new basis figures.
Estate tax implications
Bitcoin is included in the gross estate at date-of-death value. The 2024 federal exemption stands at $13.61 million, so most estates owe no federal estate tax. Estates above the threshold must report every Bitcoin holding on Form 706 and pay tax on the excess. Several states impose lower thresholds. Accurate valuation using exchange closing prices prevents both IRS penalties and disputes among beneficiaries over asset splits.
Holding period after inheritance
The holding period for inherited Bitcoin begins the day after the date of death. Any sale more than one year later qualifies for long-term capital gains rates of 0, 15, or 20 percent. Sales inside that window are short-term and taxed at ordinary rates up to 37 percent plus the 3.8 percent NIIT. Track the exact inheritance date on your records so you apply the correct holding period when reporting on Form 8949.
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