How Are Inherited Stocks Taxed When Sold? Step-Up Basis, Capital Gains & Tax Rules

Inherited stocks are taxed when sold only on gains after inheritance. The cost basis is usually stepped up to the stock’s fair market value on the date of death, meaning you pay capital gains tax only on appreciation that occurs after you inherit the shares.

KEY
POINTS

Inherited stocks are generally not taxable when received.
A step-up in basis can reduce capital gains taxes.
Only gains after inheritance are typically taxable.
Inherited stocks generally qualify for long-term capital gains treatment.
Capital gains are based on the sale price and stepped-up basis.
Accurate basis records can help avoid overpaying taxes.

Selling inherited stocks can create capital gains tax reporting requirements for the beneficiary.

The value of inherited stocks and the details of the sale determine the tax outcome reported to the IRS.

Proper documentation of the inherited investment is required when calculating and reporting the transaction.

Is A Cash Inheritance Taxable?

Generally no — inherited cash isn’t taxable income. But interest it earns, inherited retirement accounts, and some state rules can still trigger tax.

See The Exceptions →

How the Step-Up in Basis Works

An inherited property generally receives a cost basis equal to its fair market value on the decedent’s date of death.

This step-up means the heir’s starting point for tax purposes is the estate value, not what the decedent originally paid.

Example: Aunt Jane purchased shares for $10 per share many years ago. At the time of her death, those same shares were worth $100 per share.

If you inherit the stock, your tax basis is generally stepped up to the $100 per-share fair market value on the date of death, rather than Aunt Jane’s original $10 cost basis.

Situation	Basis Result	Quick Explanation
Normal inheritance	FMV at death (or alternate valuation date if elected)	New basis generally equals the property’s value at the applicable valuation date.
1-Year Gift Rule exception	Carryover basis (generally)	If you or your spouse gave the same appreciated stock to the decedent within 1 year before death, the normal step-up rule does not apply.
Community property (married couples)	Usually full step-up on entire community property	When requirements are met, both spouses’ interests receive a new basis.
Joint ownership outside community property states	Usually partial step-up	Often only the decedent’s ownership portion receives a new basis; the survivor’s portion keeps its existing basis.
After basis is determined	Use new basis for gain/loss calculation	When the stock is later sold, gain or loss is measured from this adjusted basis.

In all cases, once you determine the correct basis, that is the starting point for any gain or loss calculation when you sell the stock.

How to Calculate Taxes on Inherited Stock

When you sell inherited stock, your taxable gain or loss is computed just like any other capital asset:

Step / Situation	Formula or Rule	Example
1 Inherited basis	Adjusted Basis = FMV at date of death (or alternate valuation date if properly elected)	Stock inherited with a value of $100/share → inherited basis = $100/share.
2 Calculate gain/loss	Gain or Loss = Sale Proceeds – Adjusted Basis Sell price minus inherited basis determines taxable result.	The difference between what you receive and your inherited basis sets the taxable amount.
3 Gain scenario	Taxable Gain = Sale Price – Basis Applies when sale price exceeds the inherited basis.	Sell 100 shares at $150/share with a $100/share basis → proceeds $15,000 – basis $10,000 = $5,000 gain.
4 Loss scenario	Capital Loss = Basis – Sale Price Applies when sale price falls below the inherited basis.	Sell 100 shares at $80/share with a $100/share basis → basis $10,000 – proceeds $8,000 = $2,000 loss.
5 Break-even	No gain or loss Sale price equals the inherited basis.	Sell 100 shares at $100/share with a $100/share basis → taxable gain/loss = $0.
6 Tax treatment	Gain or loss from inherited property is generally treated as long-term capital gain or loss, regardless of how long the heir held it.	A $5,000 gain is generally taxed at long-term capital gains rates (depending on income level).
7 What’s taxed	Only growth after inheritance is generally taxable. Pre-death appreciation is stepped up and not subject to income tax.	Stock worth $100 at death sells later for $150 → tax applies only to the $50 post-death increase, not to growth that occurred before death.

Importantly, the calculation uses the FMV-based basis from the date of death.

Any appreciation or depreciation after that date determines the tax.

You pay tax only on the appreciation above the stepped-up basis, and you claim losses if the sale price falls below that basis.

Examples of Selling Inherited Stocks

Below are illustrative scenarios of inherited stock sales:

Stock Sale Scenarios

Scenario	Basis	Sale Price	Result	Tax Treatment
Sell above basis	$50/share	$80/share	+$30/share gain	Long-term capital gain
Sell at basis	$50/share	$50/share	$0 gain/loss	No tax impact
Sell below basis	$50/share	$30/share	–$20/share loss	Long-term capital loss (subject to limits)

In each case, the inherited basis is compared with the final sale price to determine whether a gain, loss, or no tax consequence occurs.

Short-Term vs. Long-Term Capital Gains for Inherited Assets

Capital gains tax rates depend on your holding period.

Inherited property always counts as long-term property for tax purposes.

If you sell or dispose of inherited property that is a capital asset, the gain or loss is considered long-term, regardless of how long you held the property.

Question	Regularly Owned Asset	Inherited Asset
How is holding period determined?	Based on how long you personally owned it	Automatically treated as long-term
Held 5 days before selling?	Short-term gain/loss	Long-term gain/loss
Held 6 months before selling?	Short-term gain/loss	Long-term gain/loss
Held more than 1 year?	Long-term gain/loss	Long-term gain/loss
Can it qualify as short-term?	Yes	No (for inherited capital assets)
Capital loss treatment	Short-term or long-term depending on holding period	Long-term loss
Main tax advantage	Must wait over one year for long-term treatment	Receives long-term treatment immediately

Example: You inherit stock on January 1 and sell it on June 30. Even though you owned the shares for only six months, any gain is generally taxed using the long-term capital gains rates because inherited property automatically receives long-term holding period treatment.

The same rule applies whether you sell the inherited stock after 5 days, 6 months, or 5 years, there is generally no short-term capital gain on inherited property.

Likewise, if you sell the asset at a loss, it is treated as a long-term capital loss for tax netting purposes, although the normal capital loss deduction limits still apply.

What If Stock Increased/ Decreased Value After Inheritance?

If the stock’s value rises after you inherit it, that increase becomes taxable capital gain when you sell. The post-inheritance appreciation is what you pay tax on.

Because your basis was stepped up to the date-of-death value, any price above that basis is gain.

Stock Increased After Inheritance

Any increase in stock value after inheritance is taxable when the stock is sold.
The inherited basis is generally the stock’s fair market value at the date of death.
Only the growth above the inherited basis is subject to capital gains tax.
Holding the stock longer can result in a larger taxable gain if the value continues to rise.
Selling soon after inheritance may result in little or no taxable gain if the sale price is close to the inherited basis.

Stock Decreased After Inheritance

A capital loss occurs when inherited stock is sold for less than its inherited basis.
The loss is based on the difference between the inherited basis and the sale price.
Inherited stock losses are generally treated as long-term capital losses.
Capital losses can offset capital gains, with unused losses subject to applicable deduction limits and carryforward rules.
A loss is generally recognized when the stock is sold or becomes worthless, not simply when its market value falls.

Example: Adam inherits stock with a stepped-up basis of $100 per share. If the stock later rises to $120 per share and he sells it, he recognizes a $20 per-share long-term capital gain.

If the stock instead falls to $60 per share before he sells, Adam realizes a $40 per-share long-term capital loss, which may be used under the normal capital loss rules.

How to Report the Sale on Your Tax Return

Inherited stock sales are reported as capital asset transactions on Form 8949 and Schedule D (Form 1040).

Collect Your Documents

Gather:

Form 1099-B from your broker, showing sale proceeds and transaction details
Trade confirmations with the sale date, shares, and price
Date-of-death FMV records for your basis documentation
Estate records, an appraisal, Form 706, or Schedule A of Form 8971, if available

Calculate Your Basis

Your inherited stock basis is generally: date-of-death FMV × number of shares.

FMV at death: $50/share Shares inherited: 100 Basis: $5,000

If sold for $6,500, your capital gain is the sale proceeds minus your basis:

$6,500 sale proceeds – $5,000 basis = $1,500 capital gain

Complete Form 8949

Report the sale on Form 8949, Part II (Long-Term Transactions).

Column	Entry
(a)	Stock description
(b)	“INHERITED” or date acquired
(c)	Date sold
(d)	Sale proceeds from 1099-B
(e)	Stepped-up basis (FMV at death)
(f)-(g)	Adjustments if broker basis is incorrect
(h)	Gain or loss

Inherited property is generally reported as long-term, regardless of how long you personally held it.

Correct the 1099-B Basis if Needed

If your broker reports:

$0 basis
An incorrect basis
Missing inherited basis information

Use the correct stepped-up basis on Form 8949 and make any required adjustment entries.

Transfer to Schedule D

Add up your Form 8949 totals and report the resulting capital gain or loss on Schedule D. Schedule D combines all your capital transactions to determine your net capital gain or loss.

Keep Supporting Records

Maintain:

Date-of-death valuation records
Form 1099-B
Broker statements and trade confirmations
Estate documents showing inheritance

You generally don’t attach these documents unless required, but keep them in case the IRS requests proof of your basis calculation.

Selling inherited stock is reported like any other capital asset sale; your tax basis is generally the stock’s fair market value on the date of inheritance.

Keep clear records of the date-of-death value, sale details, and inheritance documents to support your reported gain or loss if the IRS requests verification.

Inherited Stock Tax FAQs

Do I Owe Tax When I Inherit Stock?

No. The inheritance itself is generally not taxable. Taxes apply only if you later sell the stock for more than your cost basis.

What If I Sell Stock Immediately After Inheriting It?

Your basis is generally the stock’s fair market value on the date of death. If you sell at that value, there is no capital gain or loss.

What Capital Gains Rate Applies To Inherited Stock?

Inherited stock is generally treated as long-term capital gains. The tax rate depends on your taxable income.

Do I Report A Loss On Inherited Stock?

Yes. Report gains or losses on Form 8949 and Schedule D. Capital losses may offset gains and, in some cases, ordinary income.

What If The Estate Paid Estate Tax On The Stock?

Estate tax and capital gains tax are separate. The estate tax paid does not change your basis or create a tax credit.

How Do I Prove The Stepped-Up Basis?

Keep estate records, appraisals, or other documentation showing the stock’s value at the date of death.

Can Taxes Be Avoided On Inherited Stock?

A step-up in basis generally removes gains that occurred before death. Future gains may still be taxable when you sell.

Is Inherited Stock Subject To The Medicare Surtax?

Possibly. High-income taxpayers may owe the 3.8% Net Investment Income Tax on investment income, including capital gains.

Do State Taxes Apply To Inherited Stock?

It depends on the state. State income and inheritance tax rules vary.

Where Can I Learn More About Inherited Stock Taxes?

IRS Publications 550 and 551 provide guidance on investment income and basis rules. Complex estates may require professional tax advice.

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