How Do I Avoid Capital Gains Tax on Inherited Stock?

To avoid capital gains tax on inherited stock, you rely on a rule called the stepped-up basis: your cost basis in the shares resets to their fair market value on the date the previous owner died, which erases all the appreciation that built up during their lifetime.¹ Sell at or near the death-date price and your taxable gain is close to zero. Hold the stock longer and you only owe tax on growth that happens after the death date, which you can further reduce by selling in a low-income year, donating shares to charity, gifting to lower-bracket relatives, or offsetting with capital losses. Receiving the stock itself is not a taxable event; inherited property is excluded from your gross income under federal law.²

How the Stepped-Up Basis Erases Lifetime Gains

Cost basis is the starting value the IRS uses to measure a capital gain. For stock you bought yourself, it’s your purchase price. For inherited stock, it resets to the fair market value on the day the previous owner died, no matter what they paid decades earlier.¹

A simple example makes the mechanic clear. Your parent bought shares at $10 and they were worth $100 the day your parent died. That $90 of lifetime growth was never taxed. When the shares pass to you, your basis becomes $100. Sell immediately at $100 and the gain is zero. The $90 falls off the tax rolls permanently. This happens automatically; you don’t elect it.

The step-up is the single biggest reason inherited stock carries so little tax. Everything else in this article either protects it or deals with the smaller amount of gain that can accrue after the death date.

Pinning Down the Date-of-Death Value

The step-up only works if you can prove what the stock was worth on the right date. For publicly traded shares, the IRS defines fair market value as the average of the day’s highest and lowest selling prices.³

If the death fell on a weekend or market holiday, you weight the mean prices from the nearest trading day before and the nearest trading day after, inversely to how many trading days separate each from the death date.³ For a Sunday death with a Friday mean of $20 and a Monday mean of $23, the value is $21.50.

Save the historical pricing data. The IRS may question the basis years later, and you’ll need documentation.

The Alternate Valuation Date

An estate executor can elect to value every estate asset six months after the death instead of on the death date. If markets dropped during that window, the lower figure becomes your stepped-up basis. The election is only allowed if it reduces both the gross estate and the estate tax owed, it applies to the entire estate rather than individual assets, and anything sold or distributed within the six months locks in at the sale or distribution date.⁴ Ask the executor whether this election applies to shares you’ve received.

Sell Soon and Pay the Long-Term Rate

Inherited stock is automatically treated as a long-term holding, even if you sell the day after it hits your account. Federal law deems property acquired from a decedent to have been held more than one year regardless of your actual holding period.⁵ You never pay the higher short-term rate on these shares.

Selling soon after the death date is often the cleanest way to avoid tax. The stepped-up basis is close to the current price, so there’s almost nothing to tax. The longer you hold, the more post-death appreciation can accumulate.

2026 Long-Term Capital Gains Brackets

Long-term rates are 0%, 15%, or 20% depending on your taxable income. For 2026:⁶

0% rate: taxable income up to $49,450 single, $98,900 married filing jointly, $66,200 head of household.
15% rate: income above the 0% ceiling up to $545,500 single, $613,700 married filing jointly, $579,600 head of household.
20% rate: income above the 15% ceiling.

If your income falls in the 0% band, you can sell inherited stock with post-death gains and owe no federal capital gains tax on them. If you’re near a bracket line, timing the sale to a year when your income dips (a sabbatical, early retirement, a gap between jobs) can drop the rate.

Watch for the 3.8% Net Investment Income Tax

A separate 3.8% surtax applies to net investment income when modified adjusted gross income exceeds $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately.⁷ These thresholds don’t adjust for inflation. A large one-time sale of inherited stock can push you over the line even if your usual income stays below it, turning a 20% rate into an effective 23.8%. Spreading the sale across two or more tax years can keep you under the threshold.

Report the Sale Correctly, or You’ll Overpay

You report the sale on Form 8949, which flows into Schedule D.⁸ Because inherited stock is automatically long-term, the transaction goes in Part II. Enter “INHERITED” in column (b) for the date acquired.

Here is the trap. Most brokers never received the death-date valuation, so the 1099-B often shows the deceased owner’s original purchase price as the basis, or no basis at all. If you file what the broker reported, the IRS calculates your gain against that old low number and your tax bill balloons.

Check the right box at the top of Part II based on your 1099-B. If basis wasn’t reported to the IRS, check box E, or box F if you got no 1099-B. If the broker reported a basis but it’s the deceased owner’s old purchase price, check box D, enter code “B” in column (f) to flag a basis correction, and enter your correct stepped-up basis in column (e).⁸ Verify the basis before you file. This single step is the difference between paying tax on a small post-death gain and paying tax on decades of growth that was supposed to disappear.

Ways to Shrink the Post-Death Gain

If the stock has climbed since the death date, you have real appreciation to deal with. Four strategies can reduce or eliminate the tax on it.

Donate the Shares Directly to Charity

Giving appreciated inherited stock directly to a qualified charity avoids the capital gain entirely because you never sell. You can also generally claim an itemized deduction for the full fair market value, not just your stepped-up basis. The word “directly” matters: sell the stock first and donate the cash, and you still owe tax on the gain. Transfer the shares themselves.

Harvest Losses to Offset the Gain

Losing investments elsewhere in your portfolio can be sold in the same year to generate capital losses that cancel the gain dollar for dollar. If losses exceed gains, up to $3,000 of the excess ($1,500 married filing separately) offsets ordinary income, and the rest carries forward indefinitely.⁹

Gift Shares to a Lower-Bracket Relative

If a family member’s taxable income sits in the 0% long-term capital gains band, you can gift them stock and let them sell it tax-free. The recipient takes your basis, so the gift itself triggers nothing. The 2026 annual gift tax exclusion lets you give up to $19,000 per recipient without any gift tax reporting.¹⁰

Don’t try this with young children. The kiddie tax applies to a child under 19, or a full-time student under 24 who doesn’t earn more than half their own support, and taxes unearned income above $2,700 at the parent’s rate.¹¹ The strategy works with adult relatives who have genuinely low income.

Spread Sales Across Tax Years

Selling a large position in one year can push you into a higher capital gains bracket or trigger the NIIT. Selling in pieces across two or more years keeps each year’s gain in the lower bands.

The Community Property Double Step-Up

Married couples in community property states get an extra benefit worth paying attention to. In a common-law state, when one spouse dies, only the deceased spouse’s half of jointly held stock gets stepped up. The survivor’s half keeps its original basis.

In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), both halves of the stock step up to fair market value when one spouse dies.¹² On stock a couple bought at $20 that’s now worth $200, the double step-up eliminates the unrealized gain on the full position rather than half of it.¹³ At least half the community property interest must be includible in the deceased spouse’s gross estate for the rule to apply.

What the Step-Up Does Not Cover

Some inherited assets look like stock but don’t get the step-up, and assuming otherwise leads to large surprises. Traditional IRAs and 401(k)s do not receive a stepped-up basis. They were funded with pre-tax dollars, and withdrawals are taxed as ordinary income to the beneficiary; the deferred tax passes through with the account.¹ Bank accounts, certificates of deposit, annuities, and pensions also fall outside the step-up.

Trust-held stock depends on the trust. Shares in a revocable (living) trust the deceased controlled generally qualify because the assets remain in the taxable estate. Shares in an irrevocable trust designed to remove assets from the estate may not. If a trust is involved, the trust document and its estate tax treatment control the answer, and that’s a question for the trust’s attorney or the estate’s accountant.

1
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
2
Office of the Law Revision Counsel. 26 U.S. Code 102 – Gifts and Inheritances
3
eCFR. 26 CFR 20.2031-2 – Valuation of Stocks and Bonds
4
Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation
5
Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property
6
Internal Revenue Service. Rev. Proc. 2025-32 – Inflation Adjusted Items for 2026
7
Internal Revenue Service. Topic No. 559 – Net Investment Income Tax
8
Internal Revenue Service. Instructions for Form 8949 (2025)
9
Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
10
Internal Revenue Service. Frequently Asked Questions on Gift Taxes
11
Internal Revenue Service. Topic No. 553 – Tax on a Child’s Investment and Other Unearned Income
12
Internal Revenue Service. Publication 555 – Community Property
13
Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent