Independent research on IRS digital asset rules, 1099-DA reporting, and cross-border crypto tax compliance.
THE SHIFT
Crypto inheritance just stopped being a legal grey zone.
In 2026, the IRS finalized digital asset estate rules. Step-up basis still applies — but only if the assets are documented, custodied, and reported correctly. Trust-held crypto sits in a 1099-DA reporting gap that most estate attorneys have not yet adapted to.
TL;DR
- Step-up basis at death still applies to crypto held directly or in revocable trusts.
- Irrevocable trust crypto is outside the estate — no step-up, but no estate tax either.
- The 2026 federal estate exemption is $13.99M per individual ($27.98M married).
- 1099-DA broker reporting does not extend to most trust-held wallets — a documented gap.
- Without proof of fair market value at death, heirs default to original basis (worst case).
What changed in 2026
For years, crypto inheritance ran on assumption. Heirs received wallet keys, sold the assets, and reported gains using whatever cost basis they could reconstruct — or the deceased's original basis when nothing else was available. The IRS rarely audited because there was no broker report to compare against.
That ended on January 1, 2026. With Form 1099-DA reporting now active and the per-wallet basis rule from Rev. Proc. 2024-28 in effect, the IRS has structured visibility into individual crypto holdings for the first time. But trusts — the primary vehicle for estate planning — sit largely outside this reporting net. The result is a rule set where direct holdings are tracked tightly, trust holdings are tracked weakly, and the gap between them is now the most contested area in crypto estate planning.
How step-up basis works for crypto
Step-up basis is the rule that resets an asset's cost basis to its fair market value on the date of death. If a decedent bought 10 BTC at $10,000 each ($100,000 total) and the BTC was worth $80,000 each at death ($800,000), the heir's new basis is $800,000. If the heir sells immediately, taxable gain is zero. If they sell six months later at $90,000 per BTC, taxable gain is $100,000 — not $800,000.
This rule applies to crypto held in three structures: directly in the decedent's name, in a revocable living trust, or in a joint account where the decedent had ownership. It does not apply to crypto in irrevocable trusts (which are no longer part of the estate), in retirement accounts (which use different rules), or to crypto gifted before death (which carries the original basis forward).
The documentation requirement is the practical problem. Step-up basis is not automatic. The heir must establish fair market value at the date of death using contemporaneous price records — typically the closing price on a major exchange (Coinbase, Kraken, Binance.US) on the date of death, screenshotted or downloaded with timestamp. Without that record, the IRS can require the heir to prove the deceased's original basis instead, which often means defaulting to a much lower number and a much higher tax bill.
Revocable vs. irrevocable trust: the core decision
The choice between a revocable and an irrevocable trust is the single most consequential decision in crypto estate planning. They are not variations of the same tool — they produce opposite tax outcomes.
A revocable living trust keeps the grantor in control. The crypto remains part of the taxable estate at death, which means estate tax may apply if the estate exceeds the $13.99M exemption — but the heir gets full step-up basis. For most crypto holders below the exemption threshold, this is the simpler and more tax-efficient structure. The trust avoids probate, the basis resets, and no estate tax is owed.
An irrevocable trust removes control. Once crypto is transferred in, the grantor cannot retrieve it or change beneficiaries. The assets leave the taxable estate entirely — useful for estates above the $13.99M exemption — but the heir does not receive step-up basis. They inherit the original cost basis the grantor had when the assets were transferred into the trust. For long-held, deeply appreciated crypto, this can wipe out the tax efficiency the trust was meant to provide.
The decision rule: If your total estate is under $13.99M (single) or $27.98M (married), use a revocable trust. The estate tax does not apply, and you preserve step-up basis. If you are above the exemption and crypto appreciation is the primary driver pushing you above it, irrevocable trust strategies become defensible — but should be paired with a tax attorney's review, not a template.
The 1099-DA reporting gap for trust-held crypto
Form 1099-DA — the new digital asset broker report that started in 2026 — is built around individual taxpayer identification. When a US person opens a crypto account at Coinbase, Kraken, or Gemini, the broker collects their SSN, tracks their basis per wallet, and reports gains and losses to the IRS at year end. The reconciliation is automatic.
Trust-held crypto breaks this model. A revocable trust typically uses the grantor's SSN, so 1099-DA reporting still flows to the individual return — no gap. But irrevocable trusts use a separate Employer Identification Number (EIN), and most US crypto exchanges in 2026 have not built operational support for trust-titled accounts. The practical result is that many irrevocable trust holdings sit in self-custody wallets, with no broker reporting at all, and tax filings depend entirely on the trustee's own recordkeeping.
This is not a loophole — it is a documentation burden. The IRS still expects the trust to file Form 1041 annually and report any disposition. But without 1099-DA reconciliation, the trustee carries the full evidentiary load: per-lot basis records, transaction CSVs, on-chain transaction hashes, and FMV documentation at every taxable event. If the trustee fails to maintain these records, the IRS default position on audit is that the trust cannot prove basis — which means 100% of disposition proceeds may be treated as gain.
If you are establishing an irrevocable trust holding crypto in 2026, your trustee selection matters more than the legal structure. A trustee who does not understand wallet-level recordkeeping will lose money the structure was designed to save.
The decision framework
For most crypto holders, the framework reduces to four scenarios based on estate size and intent:
Scenario 1 — Estate under $13.99M, single beneficiary clarity: Use a revocable living trust. Crypto stays in your control during life, transfers without probate at death, heir receives full step-up basis, no estate tax. This covers the majority of US crypto holders.
Scenario 2 — Estate under $13.99M, multiple beneficiaries with different needs: Use a revocable trust with sub-trust provisions for each beneficiary. Same step-up benefit, but allows different distribution rules (lump sum vs. staggered, age-conditional, or charitable carve-outs).
Scenario 3 — Estate above $13.99M, crypto held under 5 years: Mixed strategy. Direct holdings or a revocable trust for crypto with low embedded gain (where step-up matters less), irrevocable trust for crypto with high appreciation if you want to remove it from the estate. Requires a tax attorney to model both paths.
Scenario 4 — Estate above $13.99M, crypto held over 5 years with deep appreciation: The hardest case. Irrevocable trusts remove estate tax exposure but kill step-up basis. Charitable remainder trusts (CRTs) and grantor retained annuity trusts (GRATs) become relevant — but only with specialized counsel. Do not use templates.
What to do this month
If you have crypto and no estate plan, the priority is not which trust to create — it is documentation. Without records, every structure fails on audit.
Step 1 — Create a wallet inventory. List every wallet, exchange account, and self-custody address. For each, record current balance, cost basis, acquisition date, and current location of private keys. Store this with your estate documents, not on a connected device.
Step 2 — Establish a key access plan. Step-up basis means nothing if your heirs cannot access the wallets. Use a multi-sig setup, a hardware wallet with sealed seed phrase in a safe deposit box, or a custodial service with documented inheritance procedures. Avoid sharing seed phrases in plain text.
Step 3 — Decide on revocable trust now. If your estate is under $13.99M and you do not have a revocable living trust, this is the action with the highest tax leverage per hour of effort. Cost: $1,500-$5,000 with an estate attorney. Benefit: probate avoidance plus preserved step-up basis.
Step 4 — Schedule a specialist review only if above the exemption. If your total estate is above $13.99M, this article is the starting point, not the answer. Find an estate attorney who has handled at least three crypto-inclusive estates. Ask specifically about their experience with EIN-titled trust wallets and 1099-DA reporting on Form 1041.
BOTTOM LINE
Step-up basis is the most valuable tax rule in US crypto inheritance. The 2026 IRS rules made it harder to claim by accident — and easier to lose by neglect.
For estates under the federal exemption, a revocable trust plus wallet-level documentation captures the full benefit. For estates above the exemption, the trade-off between estate tax and step-up basis is real and case-specific. Either way, the records you keep this year determine what your heirs receive next decade.
FAQ
Does step-up basis apply to crypto held in a self-custody wallet?
Yes, if the wallet is titled in the decedent's name (or a revocable trust the decedent controlled). The structure of custody — exchange account, hardware wallet, multi-sig — does not change the tax treatment. What matters is who owned the wallet legally and whether the heir can document fair market value at the date of death.
If I gift crypto to my children before death, do they still get step-up basis?
No. Gifts during life carry the donor's original cost basis forward (carryover basis). If you bought 1 BTC at $5,000 and gift it to your child when it is worth $80,000, your child's basis is still $5,000. Step-up basis only applies at death. For deeply appreciated crypto, holding until death is generally more tax-efficient than gifting during life — provided the estate stays under the exemption.
Does the 2026 federal estate exemption ($13.99M) include crypto at fair market value?
Yes. The IRS values crypto in the estate at fair market value on the date of death (or the alternate valuation date six months later, if elected). Bitcoin at $80,000 is counted as $80,000 per coin, the same as cash or publicly traded securities. Volatility before death is irrelevant for the estate calculation.
What happens if my heirs cannot access the wallet after my death?
The crypto remains part of the estate for tax purposes, but the heirs cannot realize it. They may still owe estate tax on the FMV at death even if the assets are unrecoverable. This is why key access planning matters as much as legal structure. The IRS does not refund estate tax on unrecoverable assets.
Can a foreign trust hold US crypto for estate planning?
Technically yes, but the rules are punitive. Foreign trusts holding US assets trigger Form 3520 and Form 3520-A reporting, throwback tax rules on accumulated income, and loss of step-up basis for US beneficiaries. For US persons, foreign trusts are rarely the right tool for crypto estate planning. Domestic structures are simpler and more tax-efficient.
Related Reading
| Per-Wallet Cost Basis | 1099-DA Mismatch Defense | About Davit Cho |
Official IRS Resources
- IRS Digital Assets Hub
- Form 706 — United States Estate Tax Return
- Form 1041 — Trust Income Tax Return
- Form 1099-DA — Digital Asset Broker Reporting
Editorial perspective by Davit Cho. This article is for educational purposes only and does not constitute legal, tax, or financial advice. Estate planning involves jurisdiction-specific rules and individual circumstances; consult a licensed estate attorney and a CPA with crypto experience before making decisions. Tax law and IRS guidance change frequently — verify current rules with primary sources before acting.
