What's the Difference Between a Stepped-Up Basis and a Carryover Basis?

When you receive an asset, your tax basis determines how much of any future gain will be taxable when you sell it, and inherited assets are treated very differently from gifted assets. When you inherit an asset, you receive a stepped-up basis, which means your basis is reset to the fair market value of the asset on the date of the original owner's death. This effectively wipes out any capital gain that accumulated during the deceased person's lifetime, which is one of the most powerful tax benefits in the tax code. When you receive an asset as a gift, you receive a carryover basis, meaning you take on the original owner's basis — so if they paid $10,000 for stock now worth $100,000, you'd owe capital gains tax on $90,000 when you sell. This distinction is a key reason why many estate planning strategies recommend holding appreciated assets until death rather than gifting them during life.