Join #1 A.I. tax service for freelancers

Resources

⏳C-Corp and individual extended tax returns are due October 15!

Home › Business › Federal Taxes › Tax On Inherited Stocks

Tax on Inherited Stock: A Guide

This guide will cover how are inherited stocks taxed when sold, can you inherit capital losses, how the cost of inheritance effects your taxes and capital gains tax on inherited stock.

Table of contents

Key Takeaways:...Read more

What happens when you inherit stock?...Read more

Do you pay taxes on inherited stock?...Read more

How are inherited stocks taxed when sold?...Read more

Can you inherit capital losses?...Read more

Key Takeaways:

You don’t pay immediate tax on inherited stock, but capital gains tax applies when you sell it based on the inherited stock basis.
The inherited stock basis is adjusted to the market value on the date of the original owner’s death, reducing potential capital gains tax.
While you can’t inherit capital losses directly, any losses from selling inherited stock can be used to offset other capital gains.

What happens when you inherit stock?

When you inherit stock, the process can seem a bit overwhelming, but understanding it can help you manage it more effectively. When someone passes away and leaves you stocks, you don’t need to worry about paying tax on the inherited stock at the time of inheritance. Instead, the value of the stock is adjusted to its market value on the date of the original owner’s death. This adjustment is known as the "stepped-up basis." This means that if the stock's value has gone up since the deceased person bought it, you won't be taxed on those gains if you sell it right away. If you decide to liquidate stocks after death, you can sell them, but the capital gains tax will apply only to the profit above this stepped-up basis. Also, remember that if you hold onto the stocks for a while and their value changes, you’ll need to account for those changes when you sell them.

Do you pay taxes on inherited stock?

When you inherit stock, the good news is that you generally don't face immediate taxes simply for receiving it. The cost of inheritance itself isn’t taxable, which means you don’t need to pay taxes when the stock is transferred to you. The tax implications arise later, particularly when you decide to sell the stock. The primary concern will be capital gains tax on inheritance. If the stock has appreciated since it was originally bought, you won't be taxed on those gains at the time of inheritance.

How are inherited stocks taxed when sold?

When you sell inherited stocks, the tax implications are based on a concept called the "step-up basis for inherited assets." This means that when you inherit stocks, their cost basis is adjusted to their market value on the date of the original owner’s death. This adjustment is key because it determines how much you'll owe in taxes when you sell the stocks. To put it simply, the cost basis of inherited stock is the value it had at the time of the previous owner's death. So, if your inherited stocks were worth $15,000 on the date of death, that becomes your new cost basis. If you sell these stocks for $17,000, the capital gains tax on inheritance is calculated only on the $2,000 gain—the difference between your selling price and this step-up basis. This step-up basis helps minimize the capital gains tax on inheritance because you’re only taxed on the appreciation that occurs after you inherit the stock. If the stock's value goes up after you inherit it, you'll be taxed on that increase. However, if the stock’s value decreases, you might have a loss, which could potentially be used to offset other gains.

Stepped-up basis

The stepped-up basis is a key concept when it comes to inherited assets, including stocks. Essentially, it means that when you inherit an asset, its cost basis is adjusted to its market value on the date of the original owner’s death. This adjustment can significantly impact your tax situation if you decide to sell the asset later on. So if you inherit stock that was originally bought by the previous owner for $5,000, but was worth $10,000 at the time of their death, the cost basis of inherited stock becomes $10,000. This step-up basis for inherited assets is important because it means you won't be taxed on the appreciation that occurred before you inherited the stock. So, if you later sell the stock for $12,000, you'll only pay capital gains tax on the $2,000 gain—the difference between the selling price and the stepped-up basis of $10,000. This is a big advantage because it reduces the taxable gain and, consequently, the amount of tax you owe. In short, the stepped-up basis helps you avoid paying taxes on the value increase that happened before you inherited the stock. It simplifies your tax situation by resetting the cost basis to the value at the time of inheritance, making it easier to manage any future capital gains taxes.

Infographic entitled Stepped Up Vs Cost Basis Value highlighting the difference between both inherited stock basis.

Can you inherit capital losses?

Inheriting capital losses is a bit different from inheriting gains and it's important to understand how this affects your tax situation. When you inherit stock or other assets, you don’t inherit any capital losses from the original owner. Instead, the tax rules focus on capital gains, which means the primary consideration is how much the inherited asset has appreciated in value since the original owner's death. When you inherit stock, the cost basis of that stock is stepped up to its market value on the date of the original owner's death. This stepped-up basis helps in calculating the capital gains tax on inheritance when you sell the stock. If the stock was worth less at the time of inheritance than what it was originally purchased for, you won’t benefit from inheriting that loss directly. If you sell the inherited stock at a loss, that loss is not a carryover from the previous owner's losses but rather a new loss calculated based on the stepped-up basis. For example, if the stock was worth $10,000 at the time of death (your stepped-up basis), and you sell it for $8,000, you’d have a $2,000 capital loss. You can use this loss to offset other capital gains you may have, but it doesn’t affect the previous owner’s tax situation. So, while you don’t inherit capital losses, you can still use any losses from selling inherited stock to help manage your overall tax liability. You can always get a tax pro to help you figure this out.

States with lowest property tax

The states with lowest property tax are Hawaii, Alabama, Colorado, Nevada, Utah. Assessing property tax by state is a key factor in deciding where to live.