Are capital gains taxed at death in the US?
No. Death is not a realization event for income tax. Instead, the beneficiary receives a stepped-up basis equal to the asset's fair market value on the date of death, so the appreciation that occurred during the decedent's life escapes capital gains tax entirely.
What is stepped-up basis?
Stepped-up basis resets an inherited asset's cost basis to its fair market value at the owner's death. If an heir later sells the asset, capital gain is measured only from that new basis, eliminating tax on gains that accrued during the decedent's lifetime.
How is stepped-up basis different from Canada's rules?
The systems are opposites. The US forgives lifetime gains through the step-up but imposes a separate federal estate tax on large estates. Canada has no estate tax but taxes the accrued capital gain through a deemed disposition on the final return. The same appreciated asset is treated very differently across the border.
Do community property states get a better step-up?
Yes. In community property states, when one spouse dies, both the decedent's and the surviving spouse's halves of community property are stepped up to fair market value. In common-law states, only the decedent's share receives the step-up.