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Tax on Inherited Stock: A Guide
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:
- 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
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.
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