When you inherit stocks, the shares get a new cost basis equal to their fair market value on the date the previous owner died, and any sale you make afterward is automatically treated as a long-term capital gain or loss. That single reset can erase decades of appreciation for tax purposes. Getting the benefit, though, depends on moving the shares into your name correctly and reporting the eventual sale the right way.
How the Basis Reset Works
Federal law sets the basis of inherited stock at its fair market value on the date of the owner’s death. If the decedent paid $10,000 for shares worth $50,000 at death, your basis is $50,000, and selling immediately at that price produces no taxable gain.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
The reset runs both directions. Shares the decedent bought for $50,000 that were worth only $30,000 at death give you a basis of $30,000. You can’t claim a loss for the decline that happened during the decedent’s lifetime. The statute pins basis to fair market value, not the higher of value or original cost, so a step-down is built into the same rule that produces the step-up.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
For publicly traded stock, fair market value on the date of death is the average of the highest and lowest trading prices that day.2eCFR. 26 CFR 20.2031-2 – Valuation of Stocks and Bonds Most brokerages will produce a date-of-death valuation report on request. Keep it. That report is the proof of basis you’ll need years later when you sell.
Community Property States
Spouses in community property states get a better deal than spouses in common-law states. When one spouse dies, both halves of community-owned stock receive the basis adjustment, not just the decedent’s half.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. For a couple who held appreciated stock for decades, the difference between a full step-up and a half step-up is often substantial.
When the Executor Uses the Alternative Valuation Date
If markets fall after the death, the executor can elect to value estate assets six months later instead of on the date of death. The election is only available when it reduces both the total estate value and the estate tax owed, and it’s made on Form 706 within one year of the original filing deadline including extensions.3Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation If the executor uses it, your basis is the value on that later date, which will be lower. That helps the estate’s tax bill but gives you a smaller shield against future gains. If the stock was sold or distributed before the six-month mark, the value on that date applies instead.
Getting the Shares Into Your Name
A brokerage won’t release inherited shares on a phone call. Expect to produce a specific set of documents, and expect the account to be frozen from trading while the firm reviews them.
- A certified copy of the death certificate. Order several from the vital records office, since other institutions will want their own.
- Letters Testamentary or Letters of Administration, if the account is going through probate. These are the court documents that authorize the executor or administrator to distribute estate assets.4FINRA. When a Brokerage Account Holder Dies — What Comes Next
- A Medallion Signature Guarantee on the transfer forms. This is a specialized stamp, not a notary stamp, and transfer agents will reject notarization when a Medallion Guarantee is required. Banks, credit unions, and broker-dealers that participate in a Medallion Signature Guarantee Program can issue one.5U.S. Securities and Exchange Commission. Medallion Signature Guarantees: Preventing the Unauthorized Transfer of Securities
- The brokerage’s own transfer forms. Each firm’s estate or transitions department has its own packet, which will ask for your Social Security number, the type of account you want, and whether you want the shares transferred in kind or liquidated.
Once everything is submitted, the firm verifies the court documents, confirms the Medallion Guarantee, and checks for claims. Review typically runs five to ten business days, longer for complex estates or incomplete packets.4FINRA. When a Brokerage Account Holder Dies — What Comes Next The firm then opens a new account in your name and moves the shares over without triggering a sale.
Transfer on Death Registration Skips Probate
If the account was registered with a Transfer on Death (TOD) designation naming you as beneficiary, the shares pass to you directly without court involvement. The Uniform Transfer-on-Death Securities Registration Act, adopted in some form by virtually every state, gives TOD beneficiaries this direct pathway.6Cornell Law School. Uniform Transfer-on-Death Securities Registration Act You’ll still need the death certificate and Medallion Signature Guarantee, but no Letters Testamentary. The basis step-up applies the same way.
Taxes When You Sell
Every sale of inherited stock is treated as long-term, no matter how briefly you held it or how long the decedent did. Selling the day after transfer still qualifies.7Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property Long-term capital gains are taxed at 0%, 15%, or 20% depending on your taxable income, well below ordinary income rates for most people.8Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The taxable gain or loss is the difference between the sale price and the stepped-up basis. Inherited stock with a $50,000 date-of-death value sold for $55,000 produces $5,000 of gain. Sold for $45,000, it produces a $5,000 loss. Capital losses offset capital gains dollar for dollar, and excess losses offset up to $3,000 of ordinary income per year ($1,500 if married filing separately), with the remainder carrying forward indefinitely.8Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The 3.8% Net Investment Income Tax
Higher earners owe an additional 3.8% on net investment income, and capital gains from selling inherited stock count. The surtax applies when modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married filing jointly, or $125,000 for married filing separately. It hits the lesser of net investment income or the amount your MAGI exceeds the threshold.9Internal Revenue Service. Topic No. 559, Net Investment Income Tax The thresholds are not indexed for inflation.
Reporting the Sale
Report the sale on Part II of Form 8949, the long-term section. Enter “INHERITED” in the date-acquired column, and put the date-of-death fair market value in the cost-or-other-basis column. Totals flow to Schedule D of your Form 1040.10Internal Revenue Service. Instructions for Form 8949 Watch the Form 1099-B your brokerage issues: it may report the decedent’s original purchase price rather than the stepped-up basis. If it does, correct the basis on Form 8949 using an adjustment code, or you’ll overpay tax on a gain you don’t actually owe.
Dividends Paid After the Death
Dividends paid after the date of death belong to you and are taxable income in the year received, including dividends that get automatically reinvested. Your brokerage will issue a Form 1099-DIV.11Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions Qualified dividends are taxed at the same favorable rates as long-term capital gains; ordinary dividends are taxed at your regular income tax rate.
Stocks Held Inside an IRA or 401(k) Are Different
Everything above assumes the stock sat in a regular taxable brokerage account. Shares held inside a traditional IRA or 401(k) don’t get a basis step-up. Withdrawals are taxed as ordinary income, the way they would have been for the original owner, with no long-term capital gains rate and no favorable treatment of appreciation.
If the account owner died after January 1, 2020, non-spouse beneficiaries generally have to empty the account within 10 years. Exceptions apply for minor children of the account owner (until they reach adulthood), disabled or chronically ill beneficiaries, and beneficiaries no more than 10 years younger than the deceased. If the owner had already started required minimum distributions, you have to keep taking annual distributions during those 10 years. Missing a required distribution triggers a 25% penalty on the missed amount, reduced to 10% if corrected within two years. Surviving spouses have broader options, including rolling the account into their own. A Roth IRA or Roth 401(k) is the friendliest case, with qualified withdrawals coming out tax-free, though the 10-year rule still applies to non-spouse beneficiaries.
When the Estate Is Big Enough for Estate Tax
Most people inheriting stock will never touch the federal estate tax. For 2026 deaths, estates under $15,000,000 per individual owe no federal estate tax and generally don’t file Form 706, and married couples can shelter roughly twice that through portability.12Internal Revenue Service. What’s New — Estate and Gift Tax
If the estate is large enough to require Form 706, the executor also has to report the basis of inherited property to you and to the IRS on Form 8971 and Schedule A. The values on that Schedule A cap the basis you’re allowed to claim on sale. The executor has to file Form 8971 within 30 days of the earlier of the Form 706 due date (including extensions) or the actual filing date.13IRS.gov. Instructions for Form 8971 and Schedule A If a Schedule A shows up in your mail, use those figures as your basis.
Below the exemption, no Form 706 or 8971 is required, but you still want a date-of-death valuation report from the executor or brokerage in your files. Years may pass before you sell, and when you do, that report is what tells the IRS why your basis is what you say it is.