Bitcoin & Income in Respect of a Decedent: The Definitive Guide to the Step-Up Exception That Catches Miners, Stakers, and IRA Holders

The stepped-up basis is the crown jewel of Bitcoin estate planning: at death, inherited Bitcoin resets to fair market value, permanently erasing decades of unrealized capital gains. But this rule has a critical exception that affects millions of Bitcoin holders — and almost nobody is talking about it. Income in Respect of a Decedent (IRD) is the anti-step-up. It applies to Bitcoin mining rewards sitting in a pool, staking income not yet received, deferred compensation payable in BTC, and every dollar inside a traditional IRA or 401(k). For these items, heirs don't inherit a clean slate. They inherit an ordinary income tax bill.

This guide draws the precise line between Bitcoin that gets the step-up and Bitcoin income that triggers IRD. If you hold Bitcoin in any form — self-custody, mining operation, staking protocol, retirement account — you need to understand which side of this line each position falls on. The difference, on a $1 million Bitcoin position, can exceed $370,000 in taxes your heirs either pay or don't.

What Is Income in Respect of a Decedent?

Income in Respect of a Decedent (IRD), codified in IRC §691, is income that a deceased person had earned or was entitled to receive but had not yet included in their taxable income at the time of death. The defining characteristic of IRD is straightforward but often misunderstood: it does not receive a stepped-up basis under §1014.

This is the opposite of what happens with most inherited assets. When someone dies holding appreciated stock, real estate, or Bitcoin, the heir receives a new cost basis equal to the asset's fair market value on the date of death — the famous stepped-up basis. All prior appreciation vanishes from the tax code. The heir can sell immediately and owe zero capital gains tax.

IRD items don't work that way. When the heir eventually receives or collects the IRD income, they pay income tax on it — at ordinary income rates — exactly as the decedent would have if they had lived to receive it. The tax character of the income follows it through death. Ordinary income remains ordinary income. The grave does not cleanse the tax liability.

The most common categories of IRD that estate practitioners encounter are:

• Traditional IRA, 401(k), 403(b), and other pre-tax retirement account distributions — the entire balance is IRD because the decedent never paid income tax on contributions or earnings. This is, by dollar volume, the largest category of IRD in the United States.
• Unpaid wages, salary, bonuses, and commissions earned before death but paid after — the employer still owes the compensation; the estate or heir receives it and pays income tax.
• Installment sale receivables — the gain portion of installment payments received by the estate or heirs after the seller dies.
• Accrued interest on savings bonds, CDs, or other instruments at date of death (for cash-basis taxpayers who hadn't recognized the interest).
• S-corporation or partnership income allocable to the period before death but distributed after — the decedent's share of pass-through income that hadn't yet been reported.
• Deferred compensation — any arrangement where the decedent had earned but deferred receiving compensation; the remaining payments are IRD to whoever receives them.

For Bitcoin estate planning, IRD creates a set of traps that are unique to Bitcoin's multiple income streams. Bitcoin isn't just an asset you buy and hold. For many holders, it's also mining income, staking rewards, retirement account holdings, and sometimes compensation. Each of these creates a different IRD profile at death.

Bitcoin and IRD: The Key Distinction

Here is the single most important thing to understand about Bitcoin and IRD: most Bitcoin is not IRD.

If you bought Bitcoin on an exchange, transferred it to a hardware wallet, and held it for ten years while it appreciated from $5,000 to $200,000 per coin — that Bitcoin receives a full stepped-up basis when you die. Your heirs inherit at $200,000 per coin. They can sell immediately and owe zero capital gains tax. This is the standard rule for appreciated capital assets under §1014, and it applies to Bitcoin just as it applies to stocks, bonds, and real estate.

The IRD exception kicks in when Bitcoin is connected to earned income that was never taxed. The question to ask is not "is this Bitcoin?" but rather "is this a right to receive income that the decedent earned but never reported on a tax return?"

This distinction creates a clean line that splits Bitcoin holdings into two tax worlds at death:

The practical implication is profound. A Bitcoin holder with 50 BTC in self-custody and 50 BTC in a traditional IRA dies with 100 BTC total. The 50 in self-custody pass to heirs with a fully stepped-up basis — zero tax on appreciation. The 50 in the IRA pass as IRD — heirs pay ordinary income tax (up to 37%) on every dollar withdrawn. Same Bitcoin, same price, radically different tax treatment based entirely on which wrapper holds them.

IRD Items Bitcoin Holders Actually Face

Beyond the IRA (which gets most of the attention), Bitcoin holders face several less-obvious IRD situations that estate planners routinely miss. Each requires different documentation, different planning, and different communication to heirs.

Mining Income: The Constructive Receipt Problem

Bitcoin mining rewards are ordinary income when received. The IRS has been clear on this since Notice 2014-21: a taxpayer who mines cryptocurrency must include the fair market value of the mined coins in gross income at the time of receipt. Once received and taxed, the mined Bitcoin becomes ordinary property with a basis equal to the FMV at receipt. From that point forward, it behaves like any other Bitcoin — appreciation is capital gain, and at death, it gets a stepped-up basis.

The IRD issue arises with mining rewards that have accrued but not yet been received at the time of death.

Consider a miner who operates through a mining pool. The pool accumulates rewards and pays them out periodically — daily, weekly, or when a minimum threshold is met. If the miner dies with 0.5 BTC in accrued pool rewards that haven't been paid to their wallet yet, those 0.5 BTC are IRD. The miner earned the income (performed the mining work), but hadn't yet received it (the pool hadn't distributed it). When the estate or heir eventually receives the payout, they pay ordinary income tax on the fair market value — just as the decedent would have.

For miners running significant operations, the numbers can be substantial. A mining operation producing 1 BTC per month with a weekly pool payout schedule might have 0.25 BTC in accrued rewards at any given time. At $100,000 per BTC, that's $25,000 in potential IRD — taxed at ordinary rates to the heir, not capital gains rates, and not eligible for the step-up.

Staking Rewards: The Same Analysis

Staking rewards follow the same IRD framework as mining income. When a proof-of-stake validator or delegator receives staking rewards, the fair market value is ordinary income at the time of receipt. Once received and taxed, the staked crypto is property with a cost basis — and it gets a stepped-up basis at death like any other property.

But staking rewards that have accrued in a staking protocol — pending, unbonding, or otherwise not yet distributed to the staker's wallet at the time of death — are IRD. The staker earned the income through participation in the protocol but hadn't received it. The heir steps into the decedent's shoes and pays ordinary income tax when the rewards are finally distributed.

The complication with staking is the unbonding period. Many proof-of-stake protocols require a 7-to-28-day unbonding period before staked assets and accumulated rewards can be withdrawn. If a staker dies during the unbonding period, the rewards in transit are clearly IRD — earned, not yet received. The executor must track the unbonding timeline, document the pending rewards, and communicate the IRD character to beneficiaries.

Deferred Compensation Paid in Bitcoin

An increasing number of companies — particularly in the technology and Bitcoin sectors — offer deferred compensation arrangements denominated in or payable in Bitcoin. If an employee or executive had earned deferred compensation that was to be paid in BTC (or whose value was pegged to BTC), and the employee dies before receiving all payments, the remaining unpaid deferred compensation is IRD.

This follows the general rule for all deferred compensation under IRC §691: the decedent earned the income during employment, deferred receipt to future years, and died before collecting all of it. The heir or estate that receives the remaining payments includes them in gross income as ordinary income — exactly as the decedent would have.

The Bitcoin-specific wrinkle: if the deferred compensation is paid in BTC (rather than cash), the heir receives actual Bitcoin with a basis equal to the fair market value at the time of receipt. That basis is established by the IRD inclusion — the heir reports ordinary income equal to the FMV of the BTC received. Any subsequent appreciation on that BTC from receipt forward would get a stepped-up basis if the heir later dies holding it. But the original IRD income — the deferred comp amount — is taxed at ordinary rates regardless.

Traditional IRA and 401(k) Holding Bitcoin ETFs

This is the largest IRD category for Bitcoin holders by dollar volume. Every dollar inside a traditional IRA or 401(k) — regardless of what the underlying investment is — is IRD. The entire balance. The full amount.

It does not matter whether the IRA holds Bitcoin ETFs (IBIT, FBTC, ARKB), individual stocks, bonds, or direct Bitcoin through a self-directed IRA. The IRA wrapper makes everything inside it IRD because the contributions and earnings were never taxed. The decedent got an income tax deduction when contributing (or contributed pre-tax through payroll), the earnings grew tax-deferred, and neither the contributions nor the growth were ever included in taxable income. At death, the entire balance is income that was earned but never taxed — the textbook definition of IRD.

Heirs who inherit a traditional IRA must pay ordinary income tax on every distribution. Under the SECURE 2.0 Act, most non-spouse beneficiaries must drain the entire inherited IRA within 10 years of the original owner's death. There is no stepped-up basis. There is no capital gains rate. There is no escape — only deferral within the 10-year window.

The IRA Trap for Bitcoin Holders

The IRA trap is the collision of three forces that make a traditional IRA the worst possible location for Bitcoin from an estate planning perspective:

1. No stepped-up basis. Bitcoin in a traditional IRA is IRD. It does not reset to fair market value at death. The heir's effective basis is zero — every dollar withdrawn is ordinary income.
2. Ordinary income tax rates. IRA withdrawals are taxed at ordinary rates (up to 37% federal, plus state tax). Compare: directly held Bitcoin that gets a stepped-up basis faces zero tax if sold at the stepped-up price, and long-term capital gains rates (0–20%) on any appreciation after death.
3. Forced 10-year liquidation. The SECURE 2.0 Act requires most non-spouse beneficiaries to withdraw the entire inherited IRA within 10 years. The heir cannot stretch distributions over a lifetime. For a large IRA holding Bitcoin that continues to appreciate, this compresses enormous ordinary income into a single decade — potentially pushing the heir into the highest tax brackets for 10 consecutive years.

Let's make this concrete with a side-by-side comparison:

The perverse irony: Bitcoin is the asset most penalized by the IRA wrapper. Bitcoin's entire value proposition for wealth preservation is asymmetric appreciation over long time horizons. An asset that might appreciate 100x is the last thing you want inside a container that (a) denies the step-up, (b) taxes all growth at ordinary rates, and (c) forces liquidation within a decade of inheritance. The IRA turns Bitcoin's greatest strength — its appreciation potential — into a tax liability magnifier.

For a deeper look at the alternative, see our Roth IRA conversion strategy guide — which explains how to move Bitcoin from the worst container (traditional IRA) to one of the best (Roth IRA) during your lifetime.

The §691(c) IRD Deduction: A Partial Offset

Congress recognized that IRD items face potential double taxation: once through the estate tax (if the estate exceeds the exemption) and again through income tax when the heir receives the IRD. IRC §691(c) provides a partial remedy — but it is partial, and its limitations are significant.

How the §691(c) Deduction Works

The heir who receives an IRD item and pays income tax on it may also deduct, as an itemized deduction on their income tax return, the federal estate tax attributable to that IRD item. The mechanics:

1. Calculate net IRD in the estate. Total all IRD items included in the gross estate, minus any deductions directly connected to them (e.g., expenses the decedent could have deducted against the income).
2. Calculate excess estate tax. Compute the actual federal estate tax with IRD items included, then recompute estate tax as if the IRD items had zero value. The difference is the "excess estate tax" attributable to IRD.
3. Allocate pro rata. Each time the heir receives an IRD distribution, they deduct a pro-rata share of the excess estate tax. This is a miscellaneous itemized deduction that is not subject to the 2%-of-AGI floor — it is a full above-the-line-equivalent deduction under current law.

The Critical Limitation: No Estate Tax = No Deduction

The §691(c) deduction only exists when the estate also pays federal estate tax. For 2026, the federal estate tax exemption is approximately $15 million per individual (adjusted for inflation). Estates below this threshold pay zero estate tax — and therefore generate zero §691(c) deduction.

This means the vast majority of Bitcoin IRA holders — those whose total estate is under $15 million — get no §691(c) relief whatsoever. The heir simply pays full ordinary income tax on every IRD dollar with no offset. For these families, the IRD trap is fully unmitigated.

Even for estates that do exceed the exemption and qualify for the §691(c) deduction, the deduction reduces but does not eliminate double taxation. The combined effective tax rate on IRD items in a taxable estate — estate tax plus income tax minus the §691(c) offset — can still exceed 60% at the margin. The deduction softens the blow. It does not remove it.

Planning Strategies to Minimize IRD

IRD is not destiny. Every IRD exposure described above can be reduced, restructured, or eliminated with proper planning during the Bitcoin holder's lifetime. The strategies below are listed in order of effectiveness.

Strategy 1: Roth IRA Conversion

The most powerful IRD elimination tool: convert the traditional IRA to a Roth IRA during your lifetime. You pay income tax on the conversion amount now — but once converted, the Roth IRA passes to heirs with zero IRD, zero ordinary income tax on distributions, and no step-up needed (because Roth distributions are already tax-free).

Roth conversion is especially effective when:

• Bitcoin's price has dropped significantly — converting during a drawdown reduces the taxable conversion amount. A 50% BTC price decline means 50% less income tax on conversion. This is the optimal conversion window.
• The account owner has a low-income year — retirement, business loss, or large deductions create a low marginal bracket for absorbing conversion income.
• The heir's expected tax rate is higher than the owner's current rate — paying tax now at a lower rate beats the heir paying later at a higher rate. With the potential for higher future tax rates, this comparison increasingly favors early conversion.
• Mining depreciation creates tax shelter — Bitcoin miners can use accelerated depreciation on mining equipment to create deduction capacity that offsets Roth conversion income. The mining deductions absorb the conversion tax cost, and the converted Roth IRA grows tax-free forever.

Our Roth IRA conversion strategy guide covers the full mechanics, including multi-year bracket management and the current Bitcoin price window for conversion timing.

Strategy 2: Donate IRD Assets to Charity

Charity is tax-exempt. When a traditional IRA is left to a qualified charity (outright or through a bequest), the charity receives the distributions and pays zero income tax on the IRD. The estate also receives a charitable estate tax deduction for the IRA's value.

For families with charitable intent, naming a charity as beneficiary of the traditional IRA — while leaving non-IRD assets (directly held Bitcoin, real estate, other stepped-up assets) to family members — is one of the most tax-efficient asset allocation strategies at death. The charity gets the IRD-burdened asset and pays no tax; the family gets the stepped-up assets and pays no tax. Everyone receives more after-tax value than if the allocations were reversed.

Strategy 3: Charitable Remainder Trust (CRT) as IRA Beneficiary

A Charitable Remainder Trust named as IRA beneficiary provides a hybrid solution for families who want both charitable impact and family income:

• The CRT receives the IRA distribution tax-free (the CRT is tax-exempt under §664).
• The CRT distributes an income stream to family beneficiaries over the trust term (typically 15–20 years) — spreading the IRD income over a much longer period than the 10-year mandatory distribution rule.
• Family beneficiaries pay income tax on CRT distributions as they receive them — but at lower annual amounts than a 10-year compressed withdrawal schedule.
• At the CRT's termination, the remainder passes to charity.
• The estate receives a charitable deduction for the present value of the charitable remainder.

The CRT does not eliminate IRD — the family beneficiaries still pay income tax on distributions that carry IRD character. But it extends the distribution period beyond 10 years, reduces annual IRD tax burdens, and converts some of the estate's value into a charitable deduction. For large Bitcoin IRAs, the CRT can save hundreds of thousands in cumulative tax compared to the 10-year mandatory distribution to an individual heir.

Strategy 4: Asset Location — Keep Bitcoin Out of the Traditional IRA

Prevention is simpler than cure. The optimal asset location for Bitcoin, considering both lifetime and estate tax consequences:

1. Direct personal holding (self-custody or brokerage) — full stepped-up basis at death; long-term capital gains rates during lifetime; no forced distribution schedule for heirs.
2. Roth IRA — no step-up needed (distributions are tax-free); no IRD; no RMDs during owner's lifetime; 10-year rule applies to heirs but distributions are tax-free.
3. Irrevocable trust (dynasty, IDGT, SLAT) — future appreciation escapes estate tax; grantor trust structure allows income tax to be paid by grantor (effectively gifting additional wealth); no step-up for trust assets, but capital gains rates apply (not ordinary income).
4. Traditional IRA or 401(k) — worst location for Bitcoin; no step-up; ordinary income rates; forced 10-year distribution. Use for low-appreciation assets only.

Strategy 5: Qualified Charitable Distributions (QCDs)

If you are age 70½ or older, you can make a Qualified Charitable Distribution directly from your IRA to a qualified charity — up to $105,000 per year (2026, indexed for inflation). QCDs satisfy your required minimum distribution obligation and are excluded from income entirely. They carry no IRD character.

For Bitcoin IRA holders with charitable intent, QCDs are an elegant way to drain the IRD-tainted traditional IRA over time, reducing the future tax burden for heirs. Each year's QCD reduces the IRA balance that would otherwise pass as IRD. Over a decade of annual QCDs, a significant portion of the IRA's IRD exposure can be eliminated.

Strategy 6: Name the Right Beneficiary

Even if you cannot convert or eliminate the IRA, the choice of beneficiary significantly affects the IRD impact:

• Surviving spouse: Can roll the inherited IRA into their own IRA; subject only to their own lifetime RMD schedule; can delay distributions for decades. Best outcome among all individual beneficiary choices.
• Minor children: "Eligible designated beneficiary" — can stretch distributions until age 21, then the 10-year clock starts. If the child is young, this provides decades of deferral.
• Disabled or chronically ill beneficiary: Can stretch distributions over their lifetime. If a family member qualifies, naming them can significantly extend the distribution period.
• Adult children: 10-year rule applies. Full IRD burden compressed into a single decade.
• Charity (outright): Pays no income tax. Zero IRD burden. Most tax-efficient — but family receives nothing from the IRA.
• CRT (hybrid): Family gets income stream; charity gets remainder. See Strategy 3 above.

Mining Income Estate Planning

Bitcoin miners face a unique intersection of IRD rules that most estate planners — even sophisticated ones — don't anticipate. Mining creates ongoing ordinary income, and the timing of receipt relative to death determines whether that income is IRD or property eligible for a step-up.

Mining Pool Payouts and Documentation

The executor of a miner's estate must identify and document all pending mining pool payouts at the date of death. This requires:

• Access to pool accounts. Login credentials, API keys, and two-factor authentication recovery for every mining pool the decedent used. Without access, the executor may not even know how much is pending.
• Payout history. Documentation of the pool's payout schedule, minimum thresholds, and the decedent's payout settings. This determines the constructive receipt analysis.
• Accrued balance at death. The exact BTC balance in the pool that had not yet been paid out. This is the potential IRD amount.
• Basis tracking for previously received mining income. Mined BTC that was already received and taxed has an established basis. That BTC gets a stepped-up basis at death. The executor must separate "already received and taxed" mining BTC from "accrued and unpaid" mining BTC — they have completely different tax treatments.

Mining Entities: LLC and S-Corp Structure

Many serious miners operate through an LLC or S-corporation. At death, the entity ownership interests (LLC membership units or S-corp shares) are included in the gross estate and receive a stepped-up basis on the equity value. But the story is more complicated than that.

An S-corporation or partnership (including an LLC taxed as a partnership) allocates income to its owners. If the mining entity earned income in the period before the owner's death — say, the entity received mining rewards that were allocated to the decedent on the entity's books but not yet distributed — that allocated income may be IRD to the heir.

The analysis depends on the entity type:

• S-corporation: Income allocated to the decedent for the portion of the year before death is reported on the decedent's final return. The step-up applies to the stock basis, but the inside basis of assets (mining equipment, held BTC) does not automatically adjust. Any undistributed S-corp income allocated to the decedent but paid to the heir after death is IRD.
• Partnership/LLC: The §754 election (if made) allows a step-up in the inside basis of partnership assets to the heir. This can be enormously valuable for mining entities holding appreciated BTC. Without a §754 election, the heir gets a stepped-up outside basis in the partnership interest but the partnership's inside basis in its Bitcoin remains unchanged — creating a phantom income problem on future sales.

Practical Mining IRD Mitigation

Miners can take several concrete steps to reduce IRD exposure:

• Set pool payouts to minimum thresholds. The more frequently rewards are paid out, the less is sitting as accrued IRD at any given moment. Daily payouts minimize the potential IRD amount at death.
• Document constructive receipt policies. If your pool allows on-demand withdrawal with no minimum, you may have constructive receipt of all accrued rewards — meaning the income should be reported on the miner's final tax return, not as IRD to the heir. This can actually be preferable, as the final return may have lower rates than the heir's return.
• Ensure the §754 election is in place for mining LLCs/partnerships. This allows the heir to receive a stepped-up inside basis on the entity's assets, including any held Bitcoin.
• Maintain impeccable records. Separate received-and-taxed mining BTC from accrued-and-pending mining BTC. The executor will need this distinction to properly classify assets as step-up eligible vs. IRD.
• Consider converting mining income to Roth. Mining depreciation deductions can offset the income tax cost of Roth conversions — use the mining tax benefits to move IRA assets out of the IRD trap.

Stepped-Up Basis vs. IRD: The Complete Comparison

This table summarizes the estate tax treatment of every major Bitcoin holding structure at death:

The pattern is clear: anything that was earned income never taxed is IRD at death. Anything that was a capital asset purchased with after-tax dollars gets the step-up. The wrapper matters more than the asset inside it. Structure determines tax outcome.

Practical Documentation for Executors

Executors of Bitcoin estates face unique challenges in identifying and properly reporting IRD items. Unlike traditional financial assets — where IRA custodians issue Forms 1099-R and employers issue W-2s — Bitcoin mining income, staking rewards, and self-directed IRA holdings may require manual identification and documentation.

Step 1: Inventory All Bitcoin Positions by Type

The executor's first task is to categorize every Bitcoin position the decedent held:

• Direct holdings (hardware wallets, software wallets, exchange accounts) → NOT IRD → stepped-up basis at FMV on date of death. Document wallet addresses, exchange account balances, and date-of-death prices.
• Retirement accounts (traditional IRA, 401(k), SEP-IRA, SIMPLE IRA) → ALL IRD. Contact custodians for date-of-death balances. These will be reported on Form 706, Schedule I (if filing estate tax return) and communicated to beneficiaries for their income tax returns.
• Roth accounts → NOT IRD. Note the Roth account's 5-year holding period for qualification purposes.
• Mining pool accrued balances → IRD (unless constructive receipt applies). Access pool accounts; document pending payouts and payout settings.
• Staking positions → Staked principal is NOT IRD (it's property that gets a step-up). Accrued but unpaid staking rewards ARE IRD. Separate the two.
• Deferred compensation → IRD. Contact employer for remaining payment schedule and amounts.
• Mining entity interests → The entity interest gets a stepped-up basis. But undistributed entity income allocable to the decedent may be IRD. Request K-1 data from the entity's tax preparer.

Step 2: Report on the Correct Tax Returns

IRD items flow through multiple tax returns, and the executor must get the allocation right:

• Decedent's final Form 1040: Report all income actually received (or constructively received) before death. This includes mining rewards paid out before death, staking rewards received before death, and any IRA distributions taken before death. These are NOT IRD — they're just regular income on the final return.
• Form 706 (estate tax return): Include all IRD items in the gross estate at fair market value. The IRA balance, pending mining payouts, accrued staking rewards, and deferred compensation are all included. These items are taxable for estate tax purposes AND will later generate income tax for the recipient — the §691(c) deduction is the only relief for this double taxation.
• Form 1041 (estate income tax return): If the estate itself receives IRD items during administration (e.g., mining pool pays out to the estate before distribution to heirs), the estate reports the IRD income on Form 1041 and passes the income through to beneficiaries via Schedule K-1.
• Beneficiary's Form 1040: The heir reports IRD income as ordinary income in the year received. For inherited IRAs, the custodian issues Form 1099-R. For mining/staking IRD received directly, the heir must self-report. The heir also claims the §691(c) deduction (if applicable) on their return.

Step 3: Communicate IRD Character to Beneficiaries

This step is critical and frequently missed. The executor must explicitly inform each beneficiary which inherited items are IRD and which received a stepped-up basis. Beneficiaries cannot know this on their own — especially for Bitcoin, where the same asset (BTC) can be IRD or stepped-up depending on its source.

A best-practice executor letter to Bitcoin beneficiaries includes:

• A list of all inherited Bitcoin positions with their date-of-death fair market value
• Clear identification of which positions are IRD (mining pool payouts, IRA distributions) and which received a stepped-up basis (self-custody BTC, exchange holdings)
• The stepped-up basis amount for non-IRD positions (so the heir can use it when calculating capital gains on future sales)
• The §691(c) deduction amount available to each heir (if the estate paid estate tax)
• For inherited Bitcoin tax guidance, a recommendation to consult a CPA familiar with cryptocurrency

State-Specific IRD Issues

Federal IRD rules are uniform. State treatment is not. Heirs must consider their state of residence when calculating the total tax burden on inherited IRD items.

States With No Income Tax on IRD

Heirs who reside in states with no personal income tax pay zero state tax on IRD distributions. These states include:

• Wyoming
• Nevada
• Florida
• Texas
• South Dakota
• Alaska
• Washington (no income tax; capital gains tax does not apply to IRD ordinary income)
• Tennessee (no income tax on wages/ordinary income)
• New Hampshire (taxes interest and dividends only, not IRA distributions or ordinary IRD)

For heirs with substantial IRD exposure — particularly large inherited IRAs — residence in a no-income-tax state can save 5–13% on every dollar withdrawn. On a $2M inherited IRA, the state tax difference between California (13.3% top rate) and Wyoming (0%) is $266,000.

States That Don't Conform to §691(c)

Most states that impose an income tax conform to the federal §691(c) deduction, allowing heirs to deduct estate tax attributable to IRD on their state return. However, some states have partial or non-conforming rules. Before claiming the §691(c) deduction on a state return, the heir's CPA should verify that the state of residence conforms to the federal deduction.

States with their own estate or inheritance taxes add another layer. New Jersey, Pennsylvania, Maryland, Iowa, Kentucky, and Nebraska impose state-level inheritance or estate taxes. IRD items included in the gross estate may trigger state estate tax in addition to federal estate tax and income tax — creating potential triple taxation at the state level for heirs in the most aggressive jurisdictions.

The Relocation Strategy

For heirs facing large IRD distributions over a 10-year mandatory window, relocating to a no-income-tax state before beginning distributions can be a legitimate and highly effective tax planning strategy. The state income tax savings on a $3M inherited IRA — taken over 10 years at $300,000 per year in a 10% state — totals $300,000 in state tax savings alone. That's a powerful incentive, and one that estate planners should discuss with heirs early in the process.

Frequently Asked Questions

Key Takeaways

• Most Bitcoin is NOT IRD. Bitcoin purchased and held directly gets a full stepped-up basis at death. Heirs owe zero capital gains tax. This is the default rule — and the reason direct holding is the optimal estate planning structure for Bitcoin.
• Bitcoin in a traditional IRA is always IRD. No stepped-up basis. Ordinary income tax on every withdrawal. 10-year mandatory distribution for non-spouse heirs. This is the worst estate planning container for an asset with Bitcoin's appreciation potential.
• Mining and staking rewards can be IRD. Rewards already received and taxed during the miner's lifetime get a stepped-up basis. Rewards accrued but not received at death are IRD — heirs pay ordinary income tax. Set pool payouts to minimize accrued balances.
• The §691(c) deduction helps — but only for taxable estates. Most estates under the $15M exemption get zero §691(c) relief. The heir pays full ordinary income tax on IRD with no offset.
• Roth conversion is the most powerful IRD elimination tool. Convert traditional IRA to Roth during your lifetime — especially during Bitcoin price dips. Heirs receive tax-free distributions forever.
• Asset location matters more than asset selection. The same Bitcoin in different wrappers produces $370,000+ in tax differences for heirs on a $1M position. Structure determines outcome.
• Executors must distinguish IRD from stepped-up assets. The same Bitcoin can be either, depending on its source. Proper documentation and beneficiary communication is essential.

This content is educational and does not constitute legal or tax advice. The Bitcoin Family Office works with families navigating Bitcoin wealth planning at the institutional level. Learn more about our services.