When you inherit stock, the cost basis of that inherited stock is its fair market value on the date the previous owner died, not what the deceased originally paid. This reset, called a stepped-up basis, wipes out all the appreciation that built up during the prior owner’s lifetime for tax purposes. If your grandmother bought shares for $5,000 and they were worth $100,000 the day she died, your basis is $100,000. When you sell, you only owe capital gains tax on the difference between the sale price and that new starting figure.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
How to Find the Fair Market Value on the Date of Death
For publicly traded stock, fair market value isn’t the closing price. Federal regulations define it as the average of the highest and lowest selling prices on the date of death.2eCFR. 26 CFR 20.2031-2 – Valuation of Stocks and Bonds Pull the day’s high and low from the exchange where the stock traded, add them, and divide by two.
If the person died on a Saturday, Sunday, or market holiday, you take a weighted average of the mean prices on the nearest trading days before and after, weighted by the number of trading days each is away from the date of death. If someone died on a Sunday and the mean price was $20 on the preceding Friday and $23 on the following Monday, the fair market value is $21.50, since both dates are one trading day away and get equal weight.
Keep records showing the ticker symbol, the exchange, and where you got the price. Brokerage statements, financial data services, and official exchange records all work. The IRS can question your basis years later when you sell.
The Alternate Valuation Date
The executor of the estate can elect to value all estate assets six months after the date of death rather than on the date of death itself. This election, made under Section 2032, is only available when it reduces both the gross estate value and the estate tax owed.3Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation It applies to the whole estate, so the executor can’t pick and choose. If the stock was sold or distributed to you before the six months ran, the value on that earlier date controls. Ask the executor which date applies before you compute anything.
When the Basis Steps Down Instead of Up
The same rule cuts both ways. If the stock was worth less at death than the original owner paid, your basis steps down to that lower fair market value, and the unrealized loss disappears. Say your uncle paid $50,000 for shares worth $30,000 when he died. Your basis is $30,000. Sell for $35,000 and your taxable gain is $5,000, even though the shares are still below what your uncle spent.4Internal Revenue Service. Publication 551 – Basis of Assets
Jointly Owned and Community Property Stock
When stock was held jointly and one owner dies, the step-up applies only to the deceased person’s share. In most states, if two spouses owned shares as joint tenants or tenants by the entirety, the surviving spouse gets a step-up on half the value and keeps the original basis on the other half.5CCH AnswerConnect. Basis for Survivor of Joint Tenancies or Tenancies by the Entirety If a couple paid $40,000 total for stock now worth $200,000, the surviving spouse’s new basis is $120,000: the original $20,000 basis on their half plus $100,000 for the stepped-up half.
Surviving spouses in community property states get a full step-up on both halves of qualifying community property under Section 1014(b)(6).1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent In the example above, the entire basis would reset to $200,000. The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.6Internal Revenue Service. Publication 555 – Community Property The full step-up only applies to property that actually qualifies as community property under state law. Stock held in a separate account funded before marriage may not.
Stock Held in Trusts
Whether trust-held stock gets a stepped-up basis depends on whether the shares are included in the deceased person’s taxable estate. Stock in a revocable living trust qualifies for the step-up because the grantor kept control during their lifetime, and the assets are counted in the gross estate at death. For basis purposes, a revocable trust behaves like outright ownership.
Irrevocable trusts are different. Because the grantor gave up ownership and control, the assets usually aren’t part of the grantor’s taxable estate, and the IRS has confirmed that assets in an irrevocable grantor trust that aren’t included in the estate do not receive a step-up when the grantor dies. If the trust was drafted so the assets get pulled back into the estate for tax purposes, the step-up applies. If not, the beneficiaries take the trust’s original basis. The trust document controls, so read it or ask the trustee.
A Trap: Stock You Gifted Before Death
If you gave appreciated stock to someone and that person died within one year, the shares coming back to you don’t get a stepped-up basis. You take the decedent’s adjusted basis immediately before death, which is typically the same low basis you started with. The rule blocks families from moving appreciated assets to a dying relative just to capture the step-up.4Internal Revenue Service. Publication 551 – Basis of Assets
Inherited Accounts That Don’t Get a Step-Up
Not everything you inherit resets. Assets classified as income in respect of a decedent — income the deceased earned but hadn’t received or been taxed on — keep the tax character they had in the decedent’s hands.7Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents The common ones:
- Traditional IRAs and 401(k)s. Distributions are taxed as ordinary income to you, just as they would have been to the account holder.
- Annuities. The gain portion of inherited payments is taxable income, not stepped-up principal.
- Unpaid compensation, deferred pay, bonuses, and commissions owed at death.
Regular brokerage accounts holding individual stocks, bonds, ETFs, and mutual funds do get the step-up. The confusion usually starts when people assume an inherited retirement account works like an inherited brokerage account. It doesn’t.
Selling Inherited Stock
Every sale of inherited stock is treated as a long-term capital gain or loss, regardless of how long the deceased held the shares or how quickly you sell after inheriting. Even a sale the day after death counts as long-term.8Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property That matters because long-term rates are lower than ordinary income rates.
For 2026, long-term capital gains are taxed at 0%, 15%, or 20% depending on your taxable income. Single filers pay 0% on gains up to roughly $49,450, 15% between that threshold and about $545,500, and 20% above that. Married couples filing jointly get roughly double the 0% bracket, with the 15% ceiling near $613,700.9Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
High-income taxpayers may owe an additional 3.8% net investment income tax on top of those rates. The surtax applies when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly, so the effective top rate on a large inherited stock sale can reach 23.8%.10Internal Revenue Service. Topic No. 559 – Net Investment Income Tax
Reporting the Sale
Report the sale on Form 8949, which feeds into Schedule D of Form 1040. In the date-acquired column, write “INHERITED” instead of an actual date. That signals long-term treatment and keeps IRS systems from flagging the sale for a missing acquisition date.11Internal Revenue Service. Instructions for Form 8949 Enter the stepped-up basis in the cost column. If you leave it blank or put zero, the IRS will treat your entire sale price as gain.
Your brokerage will send a 1099-B showing the sale proceeds, but brokerages often report inherited stock with an incorrect or unknown basis. Check the form. If the basis is wrong, enter the correct figure on Form 8949 and mark the appropriate adjustment code.
Form 8971 and the Basis Consistency Rule
If the estate was large enough to require a federal estate tax return (Form 706), the executor must also file Form 8971 and give each beneficiary a Schedule A listing the value of the property they received.12Internal Revenue Service. Instructions for Form 8971 and Schedule A Under Section 1014(f), your basis in inherited property cannot exceed the value reported on the estate tax return.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
The executor’s deadline for Form 8971 and the beneficiary schedules is 30 days after the Form 706 is filed or 30 days after its due date (including extensions), whichever comes first.13Internal Revenue Service. Instructions for Form 8971 and Schedule A If you receive a Schedule A, use the value on it as your basis. If the IRS later adjusts the estate value and a corrected Schedule A arrives, your basis changes with it.
Most estates fall below the filing threshold and never trigger Form 706 or Form 8971. In those cases, you determine the stepped-up basis yourself using the fair market value methods above. Either way, save the documentation. When you sell — whether next month or twenty years from now — you’ll need to show your work.