Stepped-up basis refers to a tax policy that looks at the market value of assets at the time a person inherits them instead of the value when the prior owner purchased the assets. For tax purposes, assets that are sold will be taxed for capital gains, and the more the asset value increases, the greater the capital gains taxes will be. Stepped-up basis can greatly reduce the capital gains taxes owed by someone inheriting property or other assets. For example, John purchased 100 shares of ABC Co. for $10 each, and Sarah inherited the shares after his passing when the stocks were worth $20 dollars each. When Sarah goes to sell the stocks five years later, they are worth $30 each. Under a stepped-up basis, Sarah would only pay capital gains taxes on the $10 gains between inheritance and selling the stocks ($30-$20=$10). If the stepped-up basis did not exist, Sarah would have to pay capital gains taxes on the $20 gains between John’s purchase price and selling the stocks ($30-$10=$20).
[Last updated in August of 2021 by the Wex Definitions Team]