Capital gains tax is calculated on the difference between what you paid for something and what you sold it for. That purchase figure is the cost basis. When an asset passes at death, the basis generally resets to the asset's fair market value on the date of death — the step-up — so all the appreciation that accumulated during the owner's lifetime effectively disappears for tax purposes.
Consider a house bought decades ago and worth many times that today. Sell it during life and the gain is taxable. Leave it to a child who sells soon after inheriting and the basis is the date-of-death value, so little or no gain remains to tax. Nothing about the property changed, only the basis.
Crypto is squarely inside this rule. The IRS treats digital assets as property, so tokens bought early and held through significant appreciation receive the same treatment as stock or real estate. Heirs inherit at date-of-death value rather than at the original purchase price. The practical obstacle is proof — establishing what a holding was worth on a specific date requires records the executor may have to assemble themselves.
The step-up is also why gifting appreciated assets during life is not automatically clever. A lifetime gift generally carries your original basis to the recipient; holding until death does not. Community property states treat married couples more favorably still, and this area draws recurring legislative proposals, so verify the current position first.