A client came to me two years ago with what he thought was a generous plan. He had bought 10 Bitcoin in 2015 for about $2,500 each. By 2024 it was worth roughly $600,000. He wanted to gift 2 BTC to each of his three adult children — "so they feel it while I am alive," he said.
I asked him what cost basis his children would take on the gift. He said, "Whatever it is worth the day I give it to them. Right?"
No. And that misunderstanding, by itself, was about to cost his family roughly $60,000 in unnecessary federal capital-gains tax — not counting state tax, which thankfully does not apply in Texas.
The Two Rules That Matter
There are two basis rules worth memorizing for appreciated assets.
Rule one: lifetime gifts carry over the donor's basis. If you paid $2,500 for a Bitcoin and you give it to your daughter when it is worth $60,000, her basis is $2,500. If she sells it that day, she pays long-term capital-gains tax on $57,500 of gain.
Rule two: inherited assets receive a step-up in basis to fair market value at the date of death. Same Bitcoin, same $2,500 original purchase, same $60,000 value — but this time you die holding it. Your daughter inherits it with a new basis of $60,000. If she sells it the next day at $60,000, she owes zero federal capital-gains tax.
The step-up is not a loophole. It is a deliberate feature of Internal Revenue Code Section 1014, and it is one of the most powerful wealth-transfer tools in the code.
Why This Matters So Much for Crypto Specifically
Crypto investors frequently have enormous unrealized gains. The people who bought Bitcoin in 2013, 2015, or even 2020 and held are sitting on 10x to 1000x appreciation. Those gains are exactly the kind of appreciation that step-up in basis is designed to wipe out at death.
Meanwhile, the generosity instinct — "I want to give the kids some crypto while I am alive" — is strong, and it is exactly wrong from a tax perspective for highly appreciated assets. A lifetime gift of 2 BTC with a $2,500 basis is a lifetime gift of a future tax bill. Holding the same 2 BTC until death is a gift of clean, stepped-up basis.
The Texas Community-Property Bonus
For married couples in Texas, the step-up is even more powerful. Texas is a community-property state, and at the death of the first spouse, both halves of community property — the deceased spouse's half and the surviving spouse's half — generally receive a step-up in basis. The surviving spouse can then sell the appreciated crypto with minimal gain, or hold it for another step-up at the second death.
This is a significant advantage over common-law states, where only the deceased spouse's half of joint property steps up. For a Texas family with $1 million of unrealized gain in crypto, the double step-up at the first spouse's death can save hundreds of thousands of dollars in future capital-gains tax. But it only works if the asset is properly characterized as community property — which depends on how it was acquired, titled, and maintained.
So What Should You Gift?
The planning rule of thumb I use with clients: gift what you do not want to step up. Cash is ideal for lifetime gifts. Low-basis appreciated assets are terrible for lifetime gifts and ideal to hold until death. If you want to move appreciating value out of your estate while alive — for estate-tax purposes — use techniques that do not destroy the basis step-up: GRATs, intentionally defective grantor trusts, or installment sales to grantor trusts.
If your total estate is comfortably below the federal estate-tax exemption, the calculus is even simpler: there is almost never a good reason to gift low-basis appreciated assets during life. Hold them. Your heirs will thank you.
Carla Alston holds a Master of Laws in Taxation from New York University School of Law. She leads the tax-smart estate planning practice at WG Law. Learn more or schedule a consultation.