How Do I Calculate Cost Basis for Inherited Stock?

The cost basis for inherited stock is the fair market value of the shares on the date the original owner died, not what that person paid for them. For publicly traded shares, fair market value means the average of the highest and lowest selling prices on the date of death, applied to every share of that ticker in the account.¹ This reset is called a stepped-up basis, and it applies whether or not the estate was large enough to file an estate tax return.² When you eventually sell, you owe capital gains tax only on the difference between the sale price and that stepped-up figure.

How to Calculate the Date-of-Death Value

Take the high and low trading prices for the stock on the date of death and average them. If the shares traded between a high of $74 and a low of $70 that day, the fair market value is $72 per share. That figure becomes your basis for every share of that stock in the inherited portfolio.¹

When the death falls on a weekend or a market holiday, there are no trades to average. In that case, use a weighted average of the mean prices from the nearest trading day before and the nearest trading day after, with more weight given to whichever trading day is closer. For a typical weekend death, Friday and Monday are each one trading day away, so it becomes a straight average. The regulation’s own example: if Friday’s mean is $20 and Monday’s mean is $23, the value for a Sunday death is $21.50.¹

The brokerage firm that held the shares is usually the easiest source for historical high and low prices. Most firms keep this data for years and can produce it on request. If the brokerage no longer exists or the records are unavailable, financial data services that archive daily price ranges for publicly traded securities will fill the gap. Run the calculation separately for each ticker, and keep the documentation.

When the Basis Steps Down Instead of Up

The rule runs both directions. If the stock was worth less on the date of death than the decedent paid for it, your basis is that lower fair market value.³ There is no exception preserving the original cost when the market has fallen.

Say the decedent paid $50 for a stock trading at $30 on the date of death. Your basis is $30. If you sell at $35, you have a $5 taxable gain, even though the shares are still $15 below the original purchase price. The $20 loss between purchase and death is gone for tax purposes. This catches beneficiaries who hold a depressed stock waiting to “get back to even” without realizing the tax math has already been reset lower.

The Alternate Valuation Date

The executor can elect to value estate property as of a date six months after death rather than the date of death. The election is made on Form 706 and applies to every asset in the estate, not a chosen few. Two strict conditions must be met: the election has to reduce the total value of the gross estate, and it has to reduce the estate tax owed plus any generation-skipping transfer tax.⁴

As a practical matter, most estates never use this election because the estate must be large enough to owe federal estate tax in the first place. For 2026, the federal estate tax exemption is $15 million per person.⁵ If the shares were sold or distributed to you during the six-month window, the valuation date for those specific shares is the sale or distribution date, not the six-month anniversary.⁴ Confirm with the executor whether the election was made. If it was, the executor’s reported values control your basis, and you cannot substitute the date-of-death value on your own return.

The Consistency Rule and Schedule A

For estates required to file Form 706, the executor also files Form 8971 with the IRS and furnishes a Schedule A to each beneficiary listing the reported value of the property received. You are required to use a basis consistent with the value on that Schedule A. Claiming a higher basis is not allowed.⁶

The penalties bite. Reporting a basis higher than the Schedule A amount can trigger a 20% accuracy-related penalty on the resulting underpayment. If the reported basis is 200% or more of the correct amount, the penalty rises to 40% for a gross valuation misstatement.⁶ The executor’s deadline to provide Schedule A is 30 days after Form 706 is filed or 30 days after the filing deadline (including extensions), whichever comes first.

If the estate was small enough that no Form 706 was required, the consistency rule does not apply to you. You determine fair market value independently using the high/low average. Keep the pricing data, the date-of-death documentation, and any correspondence with the brokerage. The IRS can ask you to substantiate your basis at any time.

Community Property and Joint Tenancy

Married couples in community property states get a larger benefit. When one spouse dies, both halves of community property stock receive a stepped-up basis, not just the deceased spouse’s half. If the couple’s combined basis was $80,000 and the fair market value on the date of death was $100,000, the surviving spouse’s basis in the entire holding becomes $100,000.⁷ The rule requires that at least half the value of the community property interest is includible in the deceased spouse’s gross estate.

Joint tenancy with right of survivorship works differently. Only the deceased owner’s share steps up. For a married couple with a joint brokerage account in a common-law property state, the survivor’s half keeps its original basis while the decedent’s half is revalued at fair market value. Selling the full position after death can produce a gain on the survivor’s portion even when the decedent’s portion shows no gain.

The One-Year Gift Rule

One narrow anti-abuse provision blocks the step-up. If you gifted appreciated stock to someone during the last year of their life and that same stock comes back to you through the estate, your basis is the decedent’s adjusted basis immediately before death, not the fair market value.³ The same restriction applies if the shares pass to your spouse instead of directly to you. This comes up more often than expected during late-stage illness planning.

Reporting the Sale

Once you know your basis and sell the stock, subtract the basis from the net sale proceeds to find your capital gain or loss. If you inherited 1,000 shares with a basis of $90 each and sell at $110, your gain is $20,000. Sell at $80 and you have a $10,000 deductible capital loss. Report the sale on Form 8949 and carry the totals to Schedule D.⁸

Inherited stock is automatically treated as held long-term, regardless of how long the decedent owned it or how quickly you sell after receiving the shares.⁹ You could sell the day after inheriting and still qualify for long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income and filing status.¹⁰

The 3.8% net investment income tax also applies to capital gains when your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.¹¹ Gains from inherited stock are not exempt. Selling a large inherited position in one year can push you over the threshold on its own.

One more trap: the wash sale rule applies to inherited losses. If you sell inherited shares at a loss and buy substantially identical shares within 30 days before or after the sale, the loss is disallowed and added to the basis of the replacement shares instead.

Retirement Accounts Are Different

Traditional IRAs, 401(k) balances, and other tax-deferred retirement accounts do not receive a stepped-up basis. They are treated as income in respect of a decedent and taxed as ordinary income when you take distributions, the same way the original owner would have been taxed.³ If you inherit both a brokerage account and a retirement account from the same person, the brokerage shares step up and the retirement account does not. Check the account type on the financial institution’s statements before applying any stepped-up basis.

1
eCFR. 26 CFR Part 20 – Gross Estate
2
Internal Revenue Service. Gifts and Inheritances
3
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
4
Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation
5
Internal Revenue Service. Whats New – Estate and Gift Tax
6
Internal Revenue Service. Instructions for Form 8971 and Schedule A
7
Internal Revenue Service. Publication 555, Community Property
8
Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
9
Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
10
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
11
Internal Revenue Service. Net Investment Income Tax