Capital Gains Tax Estate Planning Income Tax

IRS Disallows Step-Up in Tax Cost Basis for Assets Held by an Irrevocable Grantor Trust

Kyle G. Durante —

Under current law, assets acquired from a decedent receive an adjustment in cost basis to fair market value, thereby potentially eliminating significant unrealized gain. Although Congress has and likely will use this tax benefit as a pawn in future tax legislation, under current law, this benefit remains available to taxpayers. With respect to assets held in trusts excluded from estate tax, the IRS recently released guidance shutting the door on the application of this generous tax treatment to such assets.

Section 1014(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”) provides that “. . . 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 . . . .” But does this Code section apply to assets that are held in an irrevocable trust that is not subject to estate tax upon the settlor or donor’s death, when the settlor of the trust is treated as the owner of the assets for income tax purposes during his or her lifetime?

Capital Gains Tax Estate Planning Income Tax State Tax

NFTs: A Tale of Two Classifications

Sara K. Osinski —

On March 21, 2023, the Department of the Treasury and the Internal Revenue Service (“IRS)” released Notice 2023-27, announcing their intent to provide guidance on classifying certain non-fungible tokens (“NFTs”) as “collectibles,” which could subject owners of NFTs to higher long-term capital gains tax.

Digital assets, such as NFTs and cryptocurrencies, are currently generally classified as “property.” Therefore, under current law, gains from the sale or exchange of NFTs are taxed based on how long such NFT was held by the owner. For instance, if the owner sells an NFT he or she has held onto for one year or less, then the sale of such NFT would be subject to short-term capital gains tax. Short-term capital gains are taxed at the ordinary income rates, and the federal[1] ordinary income tax rates currently range from 10 percent to 37 percent depending on the taxpayer’s taxable income. On the other hand, if the owner sells an NFT he or she has held on to for more than one year, the sale of such NFT would be subject to federal long-term capital gains tax. Long-term capital gains are subject to federal tax at a rate of zero percent, 15 percent, or 20 percent depending on the taxpayer’s taxable income.