Taxable Asset Basis Tracking
Models the spectrum from buy-and-hold to high-turnover through a gain realization rate set by the account's basis ratio at entry
How it works
A taxable account recognizes part of each year's growth as a realized capital gain. How much is the gain realization rate, and by default it comes from the account's basis ratio when you enter it: an account entered at 20% basis realizes 20% of its growth each year, an account entered at 80% realizes 80%. That single number models the whole tax-efficiency spectrum. Low basis means buy-and-hold — little is realized annually, gains compound untaxed, and the account can outperform a tax-deferred one because the eventual gain is taxed at preferential long-term rates. High basis means active trading, with most growth taxed as it happens. The rate is fixed once at entry and does not drift afterward: contributions, sale proceeds, and harvests all change the account's basis, but none of them change how the portfolio is traded. You can override the rate directly per account when the default doesn't describe the client's behavior — a concentrated position they will never sell is the common case. Withdrawals are proportionate, and the unrealized portion is taxed on distribution.
1. Gain Realization Rate
The share of each year's growth recognized as a realized capital gain. Taken from the basis ratio at entry, or set directly per account.
Rate = Initial Basis / Initial Value (unless overridden)
Example: Account worth $100k with $20k basis → 20% rate. Of $6,000 of growth, $1,200 is realized and taxed; $4,800 stays unrealized.2. Annual Realized Gain
Applied to growth, not to account value. Realized gain is added to basis, because churned proceeds are reinvested at market.
Realized Gain = Growth × Rate (capped at the gain actually available)
Example: $1M account growing 6% realizes $60,000 × 20% = $12,000 of gain. Basis rises by the same $12,000.3. The Rate Does Not Follow Basis
Basis is an outcome of the projection; turnover is a behavior of the investor. Cash added to a taxable account is credited to basis dollar-for-dollar, so a contribution or a business sale raises the basis ratio — but not the rate. Depositing money does not make a client trade more.
Rate stays fixed; basis ratio moves freely
Example: $2M of business sale proceeds land in a $1M account entered at 20% basis. The basis ratio jumps to roughly 73%. The rate remains 20%.4. Withdrawals
Proportionate by default: each withdrawal carries the account's current basis ratio. A manual withdrawal rule can name a specific cost basis instead (specific-lot identification).
Taxable Gain = Withdrawal × (1 − Basis Ratio)
Example: $50k withdrawal from an account at 80% basis → $10k capital gain, $40k return of basis.5. Step-Up in Basis at Death
Individually-owned assets transfer to the survivor with 100% step-up (basis = fair market value), eliminating unrealized gain. Jointly-owned assets remain joint with NO step-up at first death (conservative). The step-up moves basis only — the survivor's gain realization rate is unaffected, because it was fixed at entry and never tracked basis in the first place.
Individual Assets: Inherited Basis = Fair Market Value at Death | Joint Assets: No adjustment at first death
Example: Client dies with a separately-titled $500k account (60% basis, $200k unrealized gain). Survivor inherits with $500k basis — the $200k gain is eliminated. A joint $300k account (60% basis) stays joint at its original $180k basis until both spouses are deceased.
Real-world context
IRS Cost Basis Rules
The IRS requires tracking cost basis for all taxable investments. When you sell shares, you must report the cost basis to determine capital gains or losses. Modeling a single rate against average basis captures the account-level result without lot-level complexity.
IRS reference: Publication 550 - Investment Income and Expenses
Why the Basis Ratio Makes a Good Starting Point
A portfolio's basis ratio and its turnover are two views of the same behavior. A buy-and-hold account accumulates unrealized gain, so its basis ratio drifts low. An actively traded account keeps realizing and repurchasing, so its basis stays high relative to value. That relationship is a genuine equilibrium: an account realizing exactly its basis-ratio share of growth each year holds that ratio steady indefinitely. Reading the entry basis ratio as the realization rate therefore models a continuation of whatever the client has been doing, and it costs the advisor no extra data entry. Low basis (30%) = buy-and-hold appreciated securities, gains deferred to withdrawal at preferential rates, highly tax-efficient. High basis (80%) = frequent trading and rebalancing, most gains taxed annually, least efficient.
Why Deposits Don't Change the Realization Rate
Cash entering a taxable account is credited to basis dollar-for-dollar — it has no embedded gain yet. That is correct for basis, but it means any inflow pushes the basis ratio upward. If the realization rate followed the ratio, the model would conclude that depositing money makes a client trade more, and the effect would be permanent. It is not a small distortion: $2M of business sale proceeds landing in a $1M account entered at 20% basis would drive the implied rate past 65%, recognizing millions of dollars of additional gain across a 30-year projection for no economic reason. The strategies most exposed are the ones advisors use most — business liquidation, stock option exercises, and strategic contributions to taxable. Fixing the rate at entry removes the feedback entirely. Basis still moves as it should; only the trading assumption stays put.
Step-Up in Basis — Powerful Estate Planning Benefit (Taxable Assets Only)
IRC Section 1014 provides that inherited taxable assets receive a step-up in basis to fair market value at death. This applies ONLY to taxable assets (brokerage accounts, real estate, and similar) — NOT to tax-free (Roth IRA) or tax-deferred (Traditional IRA) accounts. All unrealized capital gain on taxable assets is eliminated tax-free at death. Example: a $500k brokerage account with $300k basis carries $200k of unrealized gain; if held until death, the survivor inherits with $500k basis and that gain disappears, never taxed. This makes 'hold until death' a powerful outcome for highly appreciated taxable positions, and it is the reason a low realization rate matters so much: gain that is never recognized during life is the gain the step-up erases. The model simulates the transfer for individually-owned taxable assets by adding both value and basis dollar-for-dollar. Jointly-owned taxable assets conservatively receive no step-up at first death.
IRS reference: IRC Section 1014 - Basis of Property Acquired from Decedent
The Step-Up Does Not Change How the Survivor Trades
The step-up resets basis to full market value, which on its own would look like a portfolio that had just been liquidated and repurchased in its entirety. That is an accounting event, not a change in behavior, and the survivor's realization rate is unaffected by it — the rate was fixed when the account was entered and does not read basis at any point. The survivor still receives the full benefit of the step-up: unrealized gain existing at death is permanently eliminated. What continues is only the trading pattern. An account realizing 30% of its growth each year before the first death continues at 30% afterward, so unrealized gain rebuilds at the pace it did before. The death year itself is undisturbed. A surviving spouse who held no taxable account of their own is a special case worth naming: with nothing entered, there is no ratio to read, so the inherited account's rate is taken from the decedent's — measured before the step-up settles, so the survivor continues the decedent's trading pattern rather than inheriting a 100% turnover assumption. The first-death transition already brings a filing status change, a shift in income sources, and the consolidation of accounts; holding realization steady across it keeps the number of moving variables down.
IRS reference: IRC Section 1014 - Basis of Property Acquired from Decedent
State Law Variations and Model Treatment
The model supports both individually-owned assets (client or co-client) and jointly-owned assets. Individually-owned assets transfer to the survivor with 100% step-up at death, accurately modeling separately-titled accounts. Jointly-owned assets remain joint and receive NO step-up at first death — a conservative assumption. In reality, joint assets would receive 100% step-up in community property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI) or 50% step-up in common law states. The no-step-up treatment understates the tax benefit for both, erring toward caution in projections.
What drives the result
Determines the starting portfolio size for projections
Increasing from $100k to $150k results in 50% larger future values
Two jobs. It sets how much of a withdrawal is taxable — a 30% basis account has 70% embedded gain, so 70% of any distribution is a capital gain. And unless you override it, it also sets the gain realization rate, placing the account on the tax-efficiency spectrum: LOW basis (30%) = buy-and-hold, most efficient; HIGH basis (80%) = high turnover, least efficient.
30% basis: 30% of annual growth recognized each year, and 70% of any withdrawal is taxable gain | 80% basis: 80% of growth recognized, only 20% of a withdrawal is gain
Overrides the rate taken from the basis ratio. Use it when the basis ratio does not describe how the account is actually traded. 0% means nothing is recognized while the position is held — the gain is deferred, not erased, and is realized on withdrawal or eliminated by a step-up at death. This is the setting for a concentrated low-basis position the client has no intention of selling. Note it is a share of annual growth, not a share of the position traded.
A $2M holding at 15% basis, set to 0% realization: no capital gain is reported in any year it is held, and the full embedded gain is available for a step-up at death. Left at the default, the same position would recognize 15% of its growth every year.
Determines how fast the account grows, and therefore the dollar amount realized each year at any given rate
8% return doubles the account in ~9 years vs 6% taking ~12 years
Assumptions
- Annual dividends, interest, and realized gains are reinvested and taxed yearly
- Taxes on dividends, interest, and realized gains are paid from cash flow unless the Churn Withholding Rate is non-zero
- The gain realization rate is fixed for the whole projection — either from the basis ratio at entry or set directly. Portfolio turnover is treated as a stable behavior, not something that responds to deposits, withdrawals, or a basis step-up
- An account entered at $0 has no basis ratio to read, so its rate is set by its first inflow: an inherited transfer locks the decedent's rate, while incoming cash locks 100% (proceeds are entirely basis)
- Where several taxable accounts share an owner, they are projected as one pool and their rates are combined into a single value-weighted rate
- Portfolio maintains a materially consistent asset allocation over time
- Gains are treated as long-term capital gains (lower rate)
- No wash sales or specific lot tracking
- Individually-owned taxable assets receive 100% step-up at death; jointly-owned taxable assets receive no step-up (conservative); tax-free and tax-deferred assets are unaffected by step-up rules
Limitations
- The rate cannot change part-way through a projection. A client who expects to shift from a concentrated position to a diversified portfolio at retirement cannot express that as two different rates over time
- Accounts belonging to the same owner are pooled, and the combined rate is weighted by their values at entry. If the accounts grow apart, that weighting does not follow them
- Does not track individual lots, acquisition dates, or short-term versus long-term gains separately
- Wash sales are not modeled
- Specific-lot identification is available only on manual withdrawal rules — rate-based and automatic withdrawals are always proportionate
Related
This page explains how Stratum models this calculation. It is educational material for financial professionals, not tax or legal advice, and tax law changes. Verify current figures against primary IRS sources before relying on them with a client.