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> At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. Is this a special provision that kicks in only

by blast 2y ago

> At that point your stocks (and other assets like houses) have their cost-basis adjusted to the current price. Is this a special provision that kicks in only on death (and not before)? How long has that been in place?

JumpCrisscross 2y ago
> Is this a special provision that kicks in only on death To my knowledge, yes [1]. [1] https://en.wikipedia.org/wiki/Stepped-up_basis https://en.wikipedia.org/wiki/Stepped-up_basis > How long has that been in place? Since 1921 [1]. When the estate tax was in force, it was meant to avoid double taxation. In 1976, the Congress replaced the step-up basis with a carryover basis (you don't pay taxes on death but neither do you step up the basis). In 1980, it repealed the carryover basis "due to the record-keeping problems associated with reconstructing what a long-deceased relative might have paid for properties that had been held for generations," but didn't re-instate the step-up basis. In 2010, the estate tax was repealed. (EDIT: It was reinstated in 2011 in a neutered form [3].) [1] https://en.wikipedia.org/wiki/Stepped-up_basis https://en.wikipedia.org/wiki/Stepped-up_basis [2] https://greenleaftrust.com/missives/stepped-up-basis-a-short-history-and-why-its-back-in-the-news/ https://greenleaftrust.com/missives/stepped-up-basis-a-short... [3] https://itep.org/federal-estate-tax-historic-lows-2023/ https://itep.org/federal-estate-tax-historic-lows-2023/
- PaulDavisThe1st 2y ago
  The USA still has an estate tax.
  - JumpCrisscross 2y ago
    > USA still has an estate tax You're correct. Fixed. Would note that it's famously flouted, though usually not in entirety [1]. [1] https://www.bloomberg.com/view/articles/2014-01-30/only-idiots-pay-the-45-estate-tax https://www.bloomberg.com/view/articles/2014-01-30/only-idio...
    - PaulDavisThe1st 2y ago
      That Bloomberg article is provocatively named. You need to have assets about US$13M per person to be subject to the estate tax. So if "only idiots pay" the tax, they are rich idiots.
- PopAlongKid 2y ago
  The Wikipedia article does a poor job of explaining that it is not "step up basis", it is "basis adjustment to fair market value", which may be up or down. They do have a paragraph further down about "stepped down basis", but it still doesn't make the point clear.
mikeyouse 2y ago
It’s called the stepped up basis and yes, only applies to your estate. A married couple who bought a house in Palo Alto for $250k that’s now worth $5.25M and who bought $250k of Apple stock that’s now worth $20.25M would have a Federal tax bill of ~$5 million if they sold those assets and gave the cash to their kids. If however they were hit by a bus on the way to their accountants office, and the kids inherited the assets and sold them the next day, they would owe zero tax. There’s a popular myth that estate taxes are a second tax on income but many assets for the very wealthy are never taxed..
- mixmastamyk 2y ago
  ^^^ This is the real loophole, the rest is a distraction.
- PaulDavisThe1st 2y ago
  This is because for a long time, the USA does not tax assets other than real estate. Our tax system is structured around the fundamental idea of taxation occuring on transactions, whether that's income in exchange for labor, income resulting from the sale on (non-real-property) assets etc. I'm not sure if this is a good thing (it might be, it might not) but it's the way it is.
  - Panzer04 2y ago
    It's mostly practical, I think. Not all assets can be valued, or are liquid. Once a transaction occurs though you have both a price to tax on and the money to pay the tax.
    - mikeyouse 2y ago
      It’s awfully convenient that this ambiguity in asset prices leads to a massive an unprecedented tax break to the richest people in the country — many of whom are literal experts in valuation.
  - bruce511 2y ago
    The reverse approach has issues as well, primarily for assets that aren't easily divisible. The obvious example is family farms, or indeed the family house. Capital taxing the asset on death means a (potentially large) tax bill happens in many cases this can't be paid without selling the asset. If the sale was to another family looking for a farm, then that could be argued is neutral. But it won't be. It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms. This doesn't just apply to property. The family silver collection, the family business, the list goes on. Inheritance tax is tricky. Just passing money down entrenches an aristocratic class. Taxing it though destroys value in all kinds of areas.
js2 2y ago
Yes. It's been part of the tax code since 1921. https://www.fidelity.com/learning-center/personal-finance/what-is-step-up-in-basis https://www.fidelity.com/learning-center/personal-finance/wh... https://greenleaftrust.com/missives/stepped-up-basis-a-short-history-and-why-its-back-in-the-news/ https://greenleaftrust.com/missives/stepped-up-basis-a-short...

by blast 2y ago

JumpCrisscross 2y ago

> Is this a special provision that kicks in only on death To my knowledge, yes [1]. [1] https://en.wikipedia.org/wiki/Stepped-up_basis https://en.wikipedia.org/wiki/Stepped-up_basis > How long has that been in place? Since 1921 [1]. When the estate tax was in force, it was meant to avoid double taxation. In 1976, the Congress replaced the step-up basis with a carryover basis (you don't pay taxes on death but neither do you step up the basis). In 1980, it repealed the carryover basis "due to the record-keeping problems associated with reconstructing what a long-deceased relative might have paid for properties that had been held for generations," but didn't re-instate the step-up basis. In 2010, the estate tax was repealed. (EDIT: It was reinstated in 2011 in a neutered form [3].) [1] https://en.wikipedia.org/wiki/Stepped-up_basis https://en.wikipedia.org/wiki/Stepped-up_basis [2] https://greenleaftrust.com/missives/stepped-up-basis-a-short-history-and-why-its-back-in-the-news/ https://greenleaftrust.com/missives/stepped-up-basis-a-short... [3] https://itep.org/federal-estate-tax-historic-lows-2023/ https://itep.org/federal-estate-tax-historic-lows-2023/

PaulDavisThe1st 2y ago
The USA still has an estate tax.
- JumpCrisscross 2y ago
  > USA still has an estate tax You're correct. Fixed. Would note that it's famously flouted, though usually not in entirety [1]. [1] https://www.bloomberg.com/view/articles/2014-01-30/only-idiots-pay-the-45-estate-tax https://www.bloomberg.com/view/articles/2014-01-30/only-idio...
  - PaulDavisThe1st 2y ago
    That Bloomberg article is provocatively named. You need to have assets about US$13M per person to be subject to the estate tax. So if "only idiots pay" the tax, they are rich idiots.
PopAlongKid 2y ago
The Wikipedia article does a poor job of explaining that it is not "step up basis", it is "basis adjustment to fair market value", which may be up or down. They do have a paragraph further down about "stepped down basis", but it still doesn't make the point clear.

mikeyouse 2y ago

It’s called the stepped up basis and yes, only applies to your estate. A married couple who bought a house in Palo Alto for $250k that’s now worth $5.25M and who bought $250k of Apple stock that’s now worth $20.25M would have a Federal tax bill of ~$5 million if they sold those assets and gave the cash to their kids. If however they were hit by a bus on the way to their accountants office, and the kids inherited the assets and sold them the next day, they would owe zero tax. There’s a popular myth that estate taxes are a second tax on income but many assets for the very wealthy are never taxed..

mixmastamyk 2y ago
^^^ This is the real loophole, the rest is a distraction.
PaulDavisThe1st 2y ago
This is because for a long time, the USA does not tax assets other than real estate. Our tax system is structured around the fundamental idea of taxation occuring on transactions, whether that's income in exchange for labor, income resulting from the sale on (non-real-property) assets etc. I'm not sure if this is a good thing (it might be, it might not) but it's the way it is.
- Panzer04 2y ago
  It's mostly practical, I think. Not all assets can be valued, or are liquid. Once a transaction occurs though you have both a price to tax on and the money to pay the tax.
  - mikeyouse 2y ago
    It’s awfully convenient that this ambiguity in asset prices leads to a massive an unprecedented tax break to the richest people in the country — many of whom are literal experts in valuation.
- bruce511 2y ago
  The reverse approach has issues as well, primarily for assets that aren't easily divisible. The obvious example is family farms, or indeed the family house. Capital taxing the asset on death means a (potentially large) tax bill happens in many cases this can't be paid without selling the asset. If the sale was to another family looking for a farm, then that could be argued is neutral. But it won't be. It'll be sold to a mega-corp because they have more money to spend. So in a couple generations you kill off areas that are primarily small farms. This doesn't just apply to property. The family silver collection, the family business, the list goes on. Inheritance tax is tricky. Just passing money down entrenches an aristocratic class. Taxing it though destroys value in all kinds of areas.

js2 2y ago

Yes. It's been part of the tax code since 1921. https://www.fidelity.com/learning-center/personal-finance/what-is-step-up-in-basis https://www.fidelity.com/learning-center/personal-finance/wh... https://greenleaftrust.com/missives/stepped-up-basis-a-short-history-and-why-its-back-in-the-news/ https://greenleaftrust.com/missives/stepped-up-basis-a-short...