From a tax standpoint, it is almost always better to inherit stock than cash, provided the stock has appreciated. Inherited stock gets its cost basis reset to the fair market value on the date the owner died, which erases the built-up capital gains a beneficiary would otherwise owe tax on. Cash carries no such benefit. A dollar inherited is just a dollar. For a long-held portfolio, the difference can run into tens or hundreds of thousands in taxes the beneficiary never pays.
Why Appreciated Stock Wins: The Step-Up in Basis
Your basis in an asset is what the IRS treats as your cost when you sell. Under 26 USC 1014, when you inherit property, your basis is generally the fair market value on the date of death rather than what the decedent paid.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
A concrete example makes the point. Say your mother bought 1,000 shares at $10 in 1990, and they trade at $100 on the day she dies. Her lifetime gain is $90,000, but you owe nothing on it. Your basis becomes $100 per share. Sell that afternoon at the market price and your taxable gain is zero. Hold and sell later, and only growth above $100 is taxed.
Cash has nothing to reset. It never appreciated, so there is no embedded gain to wash away. That is the entire mechanical reason inherited stock beats inherited cash of equal value when the shares have gone up.
One practical warning: document the fair market value on the date of death. Brokerages do not always report the correct basis for inherited shares on the 1099-B they send you. If you cannot support the stepped-up figure, you may end up reporting a lower basis and paying tax you do not owe.
When Cash Is Actually the Better Inheritance
The step-up rule cuts both ways. If the shares have lost value since the decedent bought them, the basis still resets to date-of-death value, which is now lower than what was originally paid. The paper loss disappears and nobody can ever claim it.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If your father paid $50 for a stock worth $20 at his death, your basis is $20. His $30 unrealized loss is gone.
In that situation, cash of equivalent value is at least as good for you as the shares, and better for the family overall if the owner sells before death and uses the harvested loss against other gains.
Retirement Accounts Flip the Answer
Traditional IRAs and 401(k)s do not get a step-up. The tax code carves out “income in respect of a decedent” from the basis reset.2Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent – Section: Subsection (c) Every dollar you pull out of an inherited traditional IRA is ordinary income, taxed at your regular rate, exactly as it would have been in the original owner’s hands.3Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents
So the comparison flips when the “stock” is inside a traditional retirement account. $500,000 of appreciated shares in a taxable brokerage account is dramatically better than $500,000 in a traditional IRA, because the brokerage assets step up and only future growth is taxed, at long-term capital gains rates. The IRA pays ordinary income rates on the whole thing as it comes out.
Most non-spouse beneficiaries who inherited a retirement account in 2020 or later have to empty it by the end of the 10th year after the owner’s death. If the owner had already started required minimum distributions, annual withdrawals during those 10 years are also required. Surviving spouses, disabled or chronically ill individuals, beneficiaries no more than 10 years younger than the decedent, and the decedent’s minor children (who convert to the 10-year clock at 21) can still use a life-expectancy schedule.4Internal Revenue Service. Retirement Topics – Beneficiary
Inherited Roth IRAs are a separate story and one of the most tax-efficient assets around. Contributions come out tax-free at any time, and earnings come out tax-free provided the Roth has been open at least five years.4Internal Revenue Service. Retirement Topics – Beneficiary The 10-year rule still applies to most non-spouse beneficiaries, but the withdrawals themselves generally trigger no income tax.
What You Pay If You Sell Inherited Stock
Any gain on inherited stock is automatically treated as long-term capital gain, regardless of how briefly you or the decedent held the shares.5Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses – Section: Property Received as Inheritance That is a meaningful advantage, because long-term rates sit below ordinary income rates for most taxpayers.
For 2026, the long-term capital gains rates by taxable income are:6Internal Revenue Service. Revenue Procedure 2025-32
- 0% on income up to $49,450 single, $98,900 married filing jointly, $66,200 head of household
- 15% up to $545,500 single, $613,700 married filing jointly, $579,600 head of household
- 20% above those thresholds
A beneficiary in a lower bracket can sell shortly after inheriting and owe no federal capital gains tax on any post-death appreciation. Higher earners face an additional 3.8% Net Investment Income Tax when modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly. Those NIIT thresholds are not indexed for inflation.7Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses – Section: Net Investment Income Tax
Cash from an estate triggers none of this. There is no sale, no gain, and no reporting obligation beyond any income the money earns after it lands with you.
If the shares fall below your stepped-up basis and you sell, you have a capital loss. Losses offset gains dollar for dollar, and up to $3,000 of net loss can be deducted against ordinary income each year ($1,500 if married filing separately), with any remainder carried forward. Report sales on Schedule D with Form 8949, using your stepped-up basis and a long-term holding period.8Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Married in a Community Property State? The Advantage Doubles
Surviving spouses in community property states get a benefit that is easy to miss. When one spouse dies, both halves of community property receive a step-up, not just the decedent’s half.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent In a common-law state, only the decedent’s share resets.
Consider a couple who jointly owns stock bought for $100,000 that is worth $1,000,000 when one spouse dies. In a common-law state, only the decedent’s $500,000 half gets a new basis. The survivor’s half keeps its $50,000 basis, leaving $450,000 of embedded gain. In a community property state, the full $1,000,000 gets stepped up and every dollar of unrealized gain vanishes. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska lets couples opt in.
Gifts During Life Are Not the Same as Inheritance
People often lump gifted stock and inherited stock together. They are taxed very differently. Stock received as a gift during someone’s lifetime carries over the donor’s original basis under 26 USC 1015.9Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust If your uncle bought shares at $10 and gifts them to you when they trade at $100, your basis is $10, and selling costs you tax on the full $90 of appreciation.
Had he held the same shares until death, you would have inherited them with a $100 basis and owed nothing on the lifetime gain.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent For highly appreciated stock, waiting produces a much better result for the recipient. Cash gifts, by contrast, look the same whether they come during life or after death.
Estate and State Inheritance Taxes
The income tax advantages above sit on top of a separate question: is the estate itself taxable? Federal estate tax is paid by the estate before anything reaches beneficiaries and only applies to large estates. For 2026, the basic exclusion is $15,000,000 per person, and a married couple can effectively shield $30,000,000 with proper planning.10Internal Revenue Service. Whats New – Estate and Gift Tax Estates below the exemption generally do not owe federal estate tax and do not need to file Form 706. Estates above it file Form 706 within nine months of death, with a six-month extension available, and rates on the taxable portion reach 40%.11Internal Revenue Service. Instructions for Form 706 (Rev. September 2025)
Five states levy an inheritance tax on beneficiaries directly: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Rates and exemptions turn on the relationship to the decedent, with spouses generally exempt and distant relatives or unrelated beneficiaries paying the highest rates. Several other states impose their own estate tax at lower exemption thresholds than the federal level. A federal-tax-free inheritance can still generate a state bill, so check the rules of the state where the decedent lived and where you live.
The Bottom Line for a Beneficiary
If the choice is between appreciated stock and cash of equal value, take the stock. The step-up in basis erases the embedded gain, any future sale is taxed at long-term capital gains rates, and a sale right after inheriting can produce little or no tax at all. If the shares are underwater at the date of death, the calculus reverses and cash is at least as good. If the “stock” is inside a traditional IRA or 401(k), cash of the same value is usually the better inheritance, because every dollar out of that account is ordinary income. An inherited Roth IRA is the outlier on the retirement side and one of the most valuable assets you can receive.