Bitcoin Stepped Up Basis

Stepped-Up Basis Calculation for Inherited Bitcoin

This memo is published by CustodyStress, an independent Bitcoin custody stress test that produces reference documents for individuals, families, and professionals.

Date of Death Valuation Requirement

Bitcoin stepped up basis refers to the tax basis adjustment for inherited Bitcoin. When someone inherits Bitcoin, the tax basis resets to the fair market value on the date of death. This stepped-up basis determines capital gains when the heir later sells. Calculating the stepped-up basis requires knowing the Bitcoin's value on the specific death date. This value might be difficult to determine when records are incomplete.

People search for bitcoin stepped up basis when inheriting Bitcoin and needing to determine their tax basis for future sales. The search reflects awareness that inherited assets receive special tax treatment that requires specific valuation.

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Date of Death Valuation Requirement

The bitcoin stepped up basis equals the fair market value on the date of death. This creates a precise valuation requirement. The heir must determine what the Bitcoin was worth on that specific date. The date matters because Bitcoin prices change daily and sometimes dramatically.

For traditional assets, date of death valuation uses formal records. Stock prices come from exchanges. Real estate uses professional appraisals. Bank accounts have statement balances. These values are documented by third parties. The executor obtains statements and reports showing values as of the death date.

Bitcoin has no central source providing official valuations. Prices vary across exchanges. No institution issues a statement showing value on a specific date for a specific holding. The heir must determine the value themselves using price data from the death date. This self-determination creates uncertainty about which source and methodology to use.

Someone inherits Bitcoin. Their parent died on March 15. To calculate bitcoin stepped up basis, they must determine the Bitcoin's value on March 15. They check multiple sources. One exchange shows $47,200. Another shows $48,100. A price aggregator shows $47,850. Each source is defensible. The value chosen affects future capital gains calculations by hundreds or thousands of dollars. The bitcoin stepped up basis rule requires precision that Bitcoin's decentralized nature makes ambiguous.

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When Acquisition History Is Unknown

Some heirs inherit Bitcoin without knowing when or how the deceased acquired it. No purchase records exist. No transaction history was maintained. The heir knows Bitcoin exists but not its acquisition story. This information gap affects estate tax reporting and basis determination.

Estate tax returns require listing all assets and their values. Bitcoin must be included at fair market value. The executor might know Bitcoin exists from finding wallet access but not know how much exists at each address or when it was acquired. The blockchain shows transaction history but does not explain which transactions were purchases, which were transfers, and which were other activities.

Bitcoin stepped up basis calculation assumes the executor can identify all Bitcoin holdings and value them appropriately. Missing acquisition history makes it difficult to confirm all holdings have been found. The heir might discover additional Bitcoin years later. The stepped-up basis should have included this Bitcoin at death-date value. Amending estate returns after discovery creates complexity.

An executor finds a hardware wallet containing Bitcoin. The wallet shows a balance. The executor includes this Bitcoin in the estate tax return at date-of-death value. Two years later, the heir discovers a paper wallet backup with additional Bitcoin at a different address. This Bitcoin should have been in the estate return. The bitcoin stepped up basis for the newly discovered Bitcoin is still the date-of-death value, but determining that value two years late creates reporting complications and potential amendment requirements.

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Multiple Exchange Price Divergence

Bitcoin trades on hundreds of exchanges worldwide. Prices diverge across exchanges especially during volatile periods. The difference between highest and lowest price on the same day can be significant. The heir must choose which price to use for bitcoin stepped up basis calculation.

Tax guidance does not specify which exchange price to use. The executor must select a methodology and document their choice. Conservative approaches use high prices to minimize future gains. Aggressive approaches use low prices to maximize future gains. Either approach can be defended as reasonable if documented properly.

Price divergence also affects international estate complications. If the deceased held Bitcoin across multiple countries or the estate has international components, exchange prices in different currencies might diverge. The executor must decide whether to use US exchange prices, local exchange prices, or some blended approach.

An executor must value Bitcoin for a March 15 death. US exchanges show $47,500. European exchanges show equivalent of $48,200. Asian exchanges show equivalent of $46,800. The difference is over $1,400 per Bitcoin. The estate holds 10 Bitcoin. The valuation choice affects estate value by $14,000. The executor chooses US exchange average as most reasonable given US tax filing. The choice is defensible but arbitrary. Different executors might make different reasonable choices for bitcoin stepped up basis valuation.

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Intraday Price Variation

Bitcoin prices fluctuate continuously throughout each day. The price at midnight differs from noon which differs from end of day. Tax regulations specify using date of death but do not specify which time on that date. This creates intraday valuation ambiguity for bitcoin stepped up basis.

Some practitioners use end-of-day closing prices. Others use average prices across the day. Still others use the price at the approximate time of death if known. Each methodology produces different values. None is explicitly mandated by tax regulation for Bitcoin specifically.

Significant intraday price swings make methodology choice material. If Bitcoin moved from $45,000 to $50,000 during the death date, the chosen methodology creates a $5,000 per Bitcoin difference in stepped-up basis. For substantial holdings, this methodology choice has large tax implications.

Someone died at 3 PM on a day when Bitcoin started at $44,000, reached $49,000 at 2 PM, and ended at $46,000. Using time-of-death value gives approximately $48,500. Using end-of-day value gives $46,000. Using daily average gives approximately $46,300. The bitcoin stepped up basis varies by over $2,000 per Bitcoin depending on methodology. The heir holds 15 Bitcoin. The methodology choice affects basis by over $30,000 total. No clear regulatory guidance specifies which approach is correct.

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Partial Information Reconstruction

Some heirs find partial records about the deceased's Bitcoin. Old emails mention a purchase. Bank statements show a wire to an exchange. Text messages reference Bitcoin holdings. These fragments suggest Bitcoin exists but do not provide complete information. The heir must reconstruct holdings from incomplete clues.

Partial information creates both discovery obligations and uncertainty. The heir knows something about Bitcoin holdings but not everything. They must search for additional information while not knowing if they have found it all. The bitcoin stepped up basis requires identifying all holdings to value them correctly.

Reconstruction attempts might reveal some holdings while missing others. The heir finds evidence of a purchase and locates that Bitcoin. Another holding remains undiscovered. The estate tax return includes only discovered Bitcoin. Later discovery requires amendments and potentially creates penalty exposure for incomplete initial reporting despite good faith efforts.

An heir finds an email from 2015 showing their parent purchased Bitcoin. The email mentions using Coinbase but provides no account details. The heir contacts Coinbase with the death certificate. Coinbase finds an old account containing Bitcoin. The heir includes this in estate reporting. Three years later, they find another email mentioning a different exchange. That exchange also has an account with Bitcoin. The bitcoin stepped up basis calculation was incomplete because reconstruction from partial information did not reveal all holdings. The heir made good faith effort but missed something that later discovery revealed.

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Blockchain Analysis Ambiguity

The Bitcoin blockchain shows all transaction history publicly. Heirs can examine addresses to see transactions. This transparency seems helpful for determining holdings. However, blockchain analysis creates interpretation challenges. Not all Bitcoin at an address necessarily belongs to the deceased. Shared wallets, custodial arrangements, and other complexities make ownership ambiguous.

Transaction history shows movements but not intentions. A large transfer might be a sale, a transfer to cold storage, a payment, or movement to an exchange. The blockchain data is precise but meaning is unclear. The heir must interpret transaction patterns without knowing the deceased's intentions or record-keeping system.

Bitcoin stepped up basis calculation requires identifying which Bitcoin belonged to the deceased at death. Blockchain analysis shows which addresses had Bitcoin at that date. It does not definitively show which addresses the deceased controlled. The heir might include Bitcoin they do not actually control or miss Bitcoin the deceased held through third parties.

An heir finds a Bitcoin address in the deceased's papers. Blockchain analysis shows the address contains Bitcoin on the death date. The heir includes this in estate valuation. Later they discover the address was part of a multisignature arrangement with a business partner. The deceased controlled only part of the Bitcoin at that address. The bitcoin stepped up basis calculation overstated holdings because blockchain analysis showed the full address balance without revealing the partial ownership structure.

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Exchange Account Discovery Gaps

Bitcoin held on exchanges presents discovery challenges. The deceased might have accounts at multiple exchanges. No central registry lists all exchange accounts. The heir must find each account separately. Email searches might reveal some exchanges but miss others. Some accounts might be dormant for years with no recent emails.

Estate executors contact known financial institutions. Bitcoin exchanges operate globally. The executor might not know which exchanges to contact. Some exchanges have closed or moved. Account recovery procedures vary. Some exchanges require extensive documentation. Others have limited or no estate claim processes.

Bitcoin stepped up basis requires including all Bitcoin holdings. Exchange account discovery gaps mean some holdings might be missed entirely during initial estate reporting. Later discovery creates the same amendment and compliance issues as other partial information scenarios. The difference is that exchange holdings are off-blockchain and require exchange cooperation to discover.

An executor searches the deceased's email and finds accounts at two major US exchanges. They include these holdings in estate reporting. A year later, while closing out online accounts, they discover login credentials for a foreign exchange. That exchange holds additional Bitcoin. The account had been dormant for years. No recent emails mentioned it. The bitcoin stepped up basis calculation was incomplete. The executor made reasonable efforts but the discovery gap prevented complete initial reporting.

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When Multiple Heirs Disagree

Multiple heirs might inherit Bitcoin jointly. They must agree on bitcoin stepped up basis valuation for tax reporting. Different heirs might prefer different valuations based on their individual tax situations or intentions. One heir might want conservative high valuation. Another might want aggressive low valuation. The estate must use one value but heirs have conflicting interests.

This disagreement creates compliance friction. The estate tax return requires one valuation. That valuation determines each heir's basis in their inherited portion. Heirs who disagree with the chosen valuation might face individual tax consequences they find unfavorable. The conflict must be resolved to file the estate return.

Bitcoin price volatility makes basis disagreements more intense. When Bitcoin value at death was $50,000 and current value is $80,000, basis choice significantly affects each heir's potential gain. High basis minimizes future gains. Low basis maximizes them. Heirs with different investment time horizons want different basis amounts.

Three heirs inherit Bitcoin jointly. One heir plans to sell immediately. They want high bitcoin stepped up basis to minimize immediate gains. Another heir plans to hold long-term. They are less concerned with basis since their gain accumulation will overwhelm any basis difference. The third heir wants to use Bitcoin rather than sell. They prefer low basis for accounting simplicity. The estate must choose one valuation. Not all heirs can get their preferred outcome. The disagreement delays estate closing while they negotiate which valuation methodology to use.

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Professional Appraisal Alternatives

Some estates hire professional appraisers to value Bitcoin. This seems to provide objective third-party validation. However, Bitcoin appraisal has no standard methodology. Appraisers use similar sources available to anyone: exchange prices on the relevant date. The appraisal provides professional documentation but not necessarily greater accuracy.

Appraisal costs might exceed their value for straightforward Bitcoin holdings. A fee of several hundred dollars to document a value anyone could look up might seem excessive. The appraisal provides audit defense but at significant cost. Small estates might skip professional appraisal and self-document their valuation methodology.

Bitcoin stepped up basis appraisals create a documentation artifact that satisfies audit requirements without necessarily providing better valuations than the executor would reach independently. The value is in the professional opinion documenting a defensible position, not in access to better data sources.

An executor hires a professional appraiser for bitcoin stepped up basis determination. The appraiser charges $500. The appraiser uses major exchange average prices from the death date. The executor could have used the same methodology for free. The appraisal provides a professional opinion letter stating the value and methodology. During an estate audit, this letter deflects valuation questions the auditor might otherwise raise. The appraisal cost bought audit defense rather than better accuracy.

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Conclusion

Bitcoin stepped up basis calculation requires date-of-death valuation when acquisition records often did not transfer to heirs. The requirement for precise date valuation meets Bitcoin's decentralized price discovery across multiple exchanges. Heirs face methodological choices about which exchange prices to use, how to handle intraday variation, and whether to hire professional appraisers. Missing acquisition history prevents complete holding identification. Blockchain analysis shows transactions but not ownership structure. Exchange account discovery gaps mean holdings are missed during initial reporting. Multiple heirs might disagree on preferred valuation approaches.

Understanding bitcoin stepped up basis means recognizing the tax reporting obligation exists independently of information availability. Heirs must determine values without the institutional documentation traditional assets provide. Good faith efforts might still produce incomplete reporting when holdings are discovered later. The reporting obligation persists while the means to fulfill it completely remain uncertain.

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System Context

Examining Bitcoin Custody Under Stress

Can Heirs Access Bitcoin ETF Easier Than Self Custody

Bitcoin Custody Behavior When Assets Remain on an Exchange Near Death

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