What is the tax basis for inherited stock for U.S. federal income tax purposes? (2024)

FAQs

What is the tax basis for inherited stock for U.S. federal income tax purposes? ›

Cost basis and capital gains tax

What Is the Cost Basis of Inherited Stock Shares? If an individual inherits stock, its cost basis is "stepped up" to the value of the security, at the date of the inheritance. Step-up in basis is the adjustment in the cost basis of an inherited asset to its fair market value on the date of the decedent's death.

– your cost base is the deceased's cost base for the asset on the day they died. You need to keep records of all your transactions associated with acquiring, holding and disposing of your shares or units.

At the most basic level, the cost basis of an asset or security is the total amount invested in it, plus any commissions involved in the purchase. This can either be described in terms of the dollar amount of the investment, or the effective per share price paid for the investment.

In most cases, an inheritance isn't subject to income taxes. The assets a loved one passes on in an investment or bank account aren't considered taxable income, nor is life insurance.

The IRS expects taxpayers to keep the original documentation for capital assets, such as real estate and investments. It uses these documents, along with third-party records, bank statements and published market data, to verify the cost basis of assets.

Inheritances — Your holding period is automatically considered to be more than one year. So, when you sell the inherited stock, it's subject to long-term capital treatment. This applies regardless of the actual holding period.

If you receive your inheritance in the form of stocks, you have the option to hold the investments or sell the stock to liquidate the assets. From there, a broker can help you sell the stock either in full or in part. An attorney can also help provide guidance in this process by helping you understand your options.

When receiving a gift of stock, the general rule is that your cost basis is the same as the donor's original cost basis, unless the fair market value (FMV) on the date of the gift is lower. If the FMV on the gift date is lower than the donor's original cost, your cost basis is the lower FMV.

As a beneficiary, you may be required to pay taxes on your inherited assets in the future. It depends on the types of accounts you receive and what you do with those accounts. Taxable Accounts (Brokerages/Trusts) – Each year, the income you receive from your investments (e.g., dividends and interest) is taxable to you.

What happens if you don't know the cost basis of a stock sold? ›

If you can't determine exactly which shares you're selling, tax rules generally require you to calculate a gain or loss as if you're selling the earliest acquired shares (sometimes referred to as the "first in, first out" method).

For most business assets, calculating tax basis starts with the original cost of the asset, including any purchase costs, such as sales commissions and shipping fees. Then adjustments are added or subtracted. For example, depreciation reduces an asset's tax basis while capital improvements increase it.

Computing stock basis. In computing stock basis, the shareholder starts with their initial capital contribution to the S corporation or the initial cost of the stock they purchased (the same as a C corporation). That amount is then increased and/or decreased based on the pass-through amounts from the S corporation.

No tax is due specifically upon the transfer of inherited stocks from a deceased person to their heirs. However, taxes may be due as an estate tax paid by the deceased person's estate or as an inheritance paid by you as an estate beneficiary. Estate taxes are paid by the estate itself.

When you inherit you don't generally pay tax, but it does become applicable when you sell the shares, says Gorman. Capital gains tax (CGT) arises when someone disposes of an asset that has grown in value.

When someone inherits investment assets, the IRS resets the asset's original cost basis to its value at the date of the inheritance. The heir then pays capital gains taxes on that basis. The result is a loophole in tax law that reduces or even eliminates capital gains tax on the sale of these inherited assets.

Example of Gifted Stock

If the fair market value was more than the original basis when you received it, you use the original basis when you sell it. So, if your father bought the stocks for $25 per share and gave them to you when they were valued at $30 per share, you would use the original basis of $25 when you sell.

All intangible property of a resident decedent, including stocks, bonds, bank accounts, loans receivable, etc., is also taxable regardless of where it is located at the time of the decedent's death.

Cash is king of inheritance assets.

It's simplest to deal with and the value is crystal clear. If you have accounts in multiple financial institutions, consolidate cash into one account. Each bank may have different rules for distributing assets, so reducing the number of banks involved will make it easier.