Stepped-Up Basis

or how to rig the system to keep wealth in the family

Joe is Wypoxic
December 03, 2025

While MM brings you up to speed on Mexican politics and the enlightening aspects of the devil’s lettuce, I’m going to jump into a scintillating topic that I’m pretty sure will contribute to the same coma-inducing effect that Trump’s cabinet meeting had on him yesterday.

Who knew Trump meditated? Ohmmmmmmm

Let’s call this Chapter 1 in my ongoing series on “Hidden Structures that Create and Maintain Gross Inequality”.

Here goes. Raise your hand if you know what “stepped-up basis” means. Waiting. Waiting. Bueller. Bueller…

No, it’s not a new Stairmaster workout routine. It’s a clause in tax law that perpetuates gross inequality. Specifically, Internal Revenue Code §1014. Here is the key provision (no eyelid drooping please):

(a) In general Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be—

(1) the fair market value of the property at the date of the decedent’s death,

What does that mean? In layman’s terms, it means that someone inheriting property (say, corporate stock or real estate) gets to use the current fair market value (“FMV”) as the new “cost basis” for purposes of calculating capital gains or losses — thereby wiping out (or “stepping up”) prior unrealized gains (or stepping down in case of a loss).

Stick with me here. Wake up! I’ll try to explain:

Example: I inherit stock in Apple when my dad passes away. He bought the stock for $10 per share. When he passes away, it is worth $200 per share. When I decide to sell those Apples shares, my cost basis for tax purposes is now $200 per share - so if I sell those shares right away for the current FMV of $200, I PAY NO TAX. In fact, no one ever pays tax on the $190 share price difference between what my dad bought the stock for and the $200 FMV when I received the stock. The same goes for real estate or other personal property.

POOF. The capital gains tax that would normally be owed on appreciation of stock magically disappears.

Here’s the rub #1: IMHO, there is no real economic reason for this other than the fact that rich people have undue influence in making laws to ensure rich people with significant assets can pass those assets on to whomever they wish and not have the people who are inheriting the assets pay taxes like the rest of us little people.

I was researching some aspects of “Stepped-up Basis”, and I came across this innocent sounding sentence from a site called LegalClarity.org: “The step-up rule eliminates this phantom income for inherited assets.”

Here’s the rub #2: IMHO, WTF do they mean by “phantom income”?! “Phantom” my ass. An heir (who is most likely inheriting the property simply by accident of birth) is receiving “tangible and real income”; how else would you describe receiving assets with significant monetary value that you did not have before (and didn’t even have to work to obtain)? And the heir is not burdened with any tax until they sell what they received.

KEY QUESTION: Why should any income someone receives through inheritance be treated any differently than the income hard-working people receive for their labor? A lower capital gains tax rate is, in theory, to incentivize people to risk their own money in productive investments for society. But inheriting money (via assets with value) entails exactly zero risk; all you need is to be born into the right family.

CONCLUSION: We are all paying higher taxes so rich people and their heirs can avoid paying taxes because rich people and their heirs have the means and power to influence tax law. End of Story.

If you were getting sleepy, I hope this jolted you awake. If not, at least enjoy the nap…

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