Inheriting Stock: What You Need to Know About Cost Basis, Taxes, and Smart Strategy

If you’ve ever inherited stock, you might have had two immediate reactions: first, gratitude, and then, confusion. What happens next? Do you owe taxes immediately? Should you sell or keep the shares?

The good news: You usually don’t owe taxes when you inherit stock. What you do next, whether you sell, hold, or time your decisions carefully, can strongly influence what you ultimately owe. Inheriting stock can also offer a valuable tax break if you understand how cost basis and the step-up in basis rule work.

Key Takeaways

• Inherited stocks receive a “step‑up” in cost basis, resetting their value to the fair market price on the date of death.
• You won’t owe taxes right away just for inheriting stock; gains are taxable only if you later sell the shares for more than the stepped‑up value.
• Confirm your cost basis with the executor or brokerage before selling to avoid IRS reporting errors.
• Community property states may offer a double step‑up for spouses, while in common‑law states, only the decedent’s share receives it.

How Stock Inheritance Works

Stocks and mutual fund shares can transfer in several ways after someone passes away:

• Through a will or trust: The executor or trustee arranges for the assets to be retitled or distributed according to the estate plan.
• Transfer-on-death (TOD) or payable-on-death (POD) designations: These allow brokerage accounts to pass directly to named beneficiaries without the need for probate.
• Joint accounts with rights of survivorship: Ownership passes automatically to the surviving account holder.

Before the assets are released, the brokerage usually needs a death certificate and documentation such as Letters Testamentary or a certification of trust, depending on how the assets were held.​

If no beneficiary or TOD designation exists, the account may go through probate, a legal process that can delay transfers. For shares held directly with transfer agents such as Computershare, separate forms and procedures usually apply, which may differ from those used by traditional brokerage accounts.

Spousal and partner considerations: In community property states (like California or Texas), a surviving spouse may get a double step-up in basis. Domestic partners and non-spouse heirs, however, don’t automatically receive the same estate tax benefits under federal law, so planning ahead matters.

Note: Inherited retirement accounts follow entirely different tax rules. This article focuses on taxable (non-retirement) investments.

2. Understanding Cost Basis and the Step-Up Rule

Cost basis is the original value used to determine gains or losses when you sell an investment. For example, if you bought Apple stock years ago for $50 a share and sold at $200, your gain is $150 per share. But when you inherit stock, the math changes.

The “step-up in basis” rule

For inherited stocks, the IRS generally allows the cost basis to be reset to the fair market value (FMV) on the date of death. In some cases, the executor may use an alternate valuation date, up to six months later, but only if the estate is large enough to require filing Form 706 (the federal estate tax return).

That means if your uncle bought those Apple shares at $50 but they were worth $200 when he passed away, your new cost basis is $200. If you sell them for $205, you only owe tax on the $5 gain (ignoring transaction costs).

When the step-up doesn’t apply:

• Lifetime gifts don’t get a step-up; they retain the donor’s original cost basis (the carryover rule).
• Certain irrevocable trusts may not qualify for a step-up under updated IRS guidance starting in 2025.
• Assets that have declined in value are stepped down to their lower fair market value.

In common‑law states, when jointly owned assets pass to a surviving co‑owner, only the deceased’s half typically receives a step‑up in basis. The survivor’s original half keeps its original cost basis, unlike married couples in community property states, where both halves often receive a double step‑up.

Why it matters: A properly documented step-up can mean the difference between little to no tax and a large capital gains bill later.

3. How Capital Gains Tax Works on Inherited Stock

Here’s another break: when you sell inherited stock, the IRS automatically treats it as “deemed to have a long-term holding period,” even if you sell it the next day.​ Regardless of how long the decedent owned the stock, all inherited assets are treated as long-term for capital gains tax purposes.

Calculating the gain or loss

Sale price – stepped-up cost basis = taxable gain or deductible loss.

Selling shortly after inheritance typically means minimal gain and minimal tax.

Holding for years can result in new gains above the stepped-up basis, which will be taxable when sold.

Example:
Your parent bought a stock for $20 that’s now worth $90. At their passing, your new basis steps up to $90. If you sell it quickly for $92, your taxable gain is only $2 per share, instead of $72.

Tax rates to know

• Federal long-term capital gains: 0%, 15%, or 20% depending on income level
• Possible 8% Net Investment Income Tax (NIIT) for higher-income individuals
• State capital gains taxes may also apply.

Tip: Always confirm the cost basis with the executor or financial institution before selling to avoid misreporting on your tax return.

4. Estate and Inheritance Taxes: What Heirs Should Know

Here’s how federal, state, and inheritance taxes may affect what you receive.

Federal estate tax

• This tax is paid by the estate, not by the heir.
• The 2025 exemption is $13.99 million per person, subject to inflation adjustments or future legislative changes.
• The majority of estates fall below this threshold and won’t owe federal estate tax.
• Estates that exceed the federal exemption are subject to a progressive federal estate tax, which tops out at 40 % on amounts above the exemption threshold.

Inheritance tax

The U.S. has no federal inheritance tax, but a handful of states (Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) impose one. Iowa’s inheritance tax will no longer apply by 2025.

Whether you pay depends on your relationship to the decedent. Spouses are often exempt; more distant heirs may owe tax.

State-level estate taxes

States like Massachusetts and Oregon have their own estate taxes with much lower exemptions, which can affect stock transfers even when no federal estate tax is due.

Impact on partners and non-spouses

Federal estate tax marital deductions apply only to legally married spouses, which can make estate planning especially important for domestic partners and non-traditional families.

5. Should You Hold or Sell Inherited Stocks?

Whether to hold or sell depends on a mix of tax strategy, investment goals, and personal circumstances.

Key factors to weigh

Tax implications: Selling soon after inheritance often means very low gains due to the step-up in basis.

Investment strategy: Evaluate whether the inherited stocks fit your overall portfolio goals.

Emotional considerations: Sentimental attachment can lead to poor financial decisions if it overrides sound strategy. On the flip side, you may want to honor a legacy or maintain family control of the stock.

Pros of selling right away

• Minimal taxable gain due to the recent step-up.
• Simplifies accounting and rebalancing your portfolio.

Risks of holding

• Market volatility or over-concentration in one company or sector.
• Emotional bias may prevent rational decisions.

6. Managing, Reporting, and Planning for Inherited Stock

Proper reporting and organization after inheriting stock help reduce tax complications and simplify future planning.

Tax Reporting and Record Keeping

• The brokerage will issue a Form 1099-B when you sell, reflecting the sale price. Verify that the cost basis reflects the stepped-up value; if not, provide documentation to correct it.
• Report sales on Schedule D of your federal tax return.
• Executors or tax professionals may use Form 706 (if the estate filed one) to document the fair market value at death.
• Always keep statements or valuations confirming the date-of-death pricing for future reference and in case of IRS questions.

Planning for the next generation

• Review and update beneficiary designations and TOD registrations regularly.
• Use trusts for complex situations (e.g., multiple heirs or blended families).
• Maintain organized cost basis records to simplify future inheritances.
• Communicate your intentions early to prevent confusion or disputes later.
• Work with a tax preparer or financial advisor to help ensure proper reporting.

Preserve Value, Simplify Taxes, and Plan Ahead

Receiving stock can reshape your financial future if you take the right steps from the start. Understanding how cost basis, step-up rules, and capital gains taxes work can make a substantial difference in what you or your heirs ultimately keep.

Handled wisely, these rules can dramatically reduce your tax burden and preserve more of your loved one’s legacy. From properly documenting the step-up to deciding when to sell, each decision can have a long-term impact on your financial future.

SKY IG helps families navigate the complex tax and estate considerations of inherited investments from valuation to liquidation and beyond. A well-structured plan today can ensure your legacy lasts for generations.

If you’ve recently inherited stocks or are planning ahead for your own estate, now is the perfect time to get clarity, simplify, and plan smartly.