Do You Pay Taxes on Inherited Stocks? Basis, Gains, Dividends

You do not pay taxes on inherited stocks at the moment you receive them, but you can owe taxes later. When you sell the shares, capital gains tax applies to any increase in value above your “stepped-up basis,” which is usually the stock’s fair market value on the date the previous owner died. If the shares pay dividends while you hold them, you owe income tax on those dividends each year. So the short answer to whether you pay taxes on inherited stocks is: not on the inheritance itself, but yes on what happens after.

Nothing Is Owed When the Stocks Transfer to You

The federal government does not tax beneficiaries for receiving an inheritance. There is no federal inheritance tax that lands on you as the recipient.¹ The estate itself may owe federal estate tax, but only if it exceeds a very high threshold: $15 million per individual for someone dying in 2026, and effectively $30 million for a married couple using portability.² Most estates fall well below that line and owe no federal estate tax at all.³ Any tax the estate does owe is the estate’s obligation, not yours.

A handful of states run their own estate taxes with far lower thresholds, and five states impose an inheritance tax directly on beneficiaries. Rates depend on your relationship to the person who died; close relatives usually pay little or nothing. If the person you inherited from lived in one of those states, check the rules there.

The Stepped-Up Basis Is Where Most of Your Tax Outcome Is Decided

When you buy stock yourself, your cost basis is what you paid, and you’re taxed on the gain from that price. Inherited stock uses a different starting point: your basis is the stock’s fair market value on the date the previous owner died, not what they originally paid.⁴

This can wipe out enormous amounts of tax. Say a parent bought shares for $10 each thirty years ago, and they were worth $100 on the day they died. Your basis is $100. The $90 per share of lifetime appreciation is never taxed. Sell at $100 and you owe zero capital gains tax.¹

The step-up also works downward. If the stock was worth less at death than the original owner paid for it, your basis is the lower value. You could inherit at $80 and sell at $70 for a real, deductible loss.

The Alternative Valuation Date

The executor can choose to value estate assets six months after the date of death instead of on the date itself. Federal law allows this only when it lowers both the total estate value and the estate tax owed.⁵ If the executor makes that election, your stepped-up basis becomes the value on that later date rather than the date of death.⁶ That usually means a lower basis for you.

The One-Year Give-Back Rule

One exception catches families off guard. If you gave someone appreciated stock, that person died within one year, and the stock came back to you through their estate, you do not get a step-up. Your basis is whatever the deceased person’s adjusted basis was before death, which is normally the low basis you had when you originally gifted the stock.⁴ The rule prevents transferring low-basis assets to a terminally ill relative just to reset the basis.

Joint Accounts and Community Property

How much of the stock gets a step-up depends on how it was owned. In most states, if spouses held stock jointly, only the deceased spouse’s half receives a stepped-up basis. The survivor keeps the original basis on their half. So if a couple bought stock together for $50,000 and it was worth $100,000 at death, the surviving spouse’s new basis is $75,000: the stepped-up half ($50,000) plus the survivor’s original $25,000.

In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), both halves of community property receive a full step-up when one spouse dies. In the same example, the surviving spouse’s basis jumps to the full $100,000. This double step-up is one of the largest tax advantages of community property ownership.

What You’ll Owe When You Sell

Capital gains tax applies only to the difference between your sale price and your stepped-up basis. Lifetime growth that happened while the original owner held the shares stays outside the tax base.

Inherited stock gets favorable rate treatment automatically. Federal law treats the gain as long-term even if you sell the shares the day after you receive them.⁷ For 2026, long-term capital gains rates are:

0% if taxable income is below $49,450 (single) or $98,900 (married filing jointly)
15% for income up to $545,500 (single) or $613,700 (married filing jointly)
20% above those amounts

These rates apply to the gain only, never the entire sale price.⁸

Higher earners pay an additional 3.8% net investment income tax on capital gains once modified adjusted gross income passes $200,000 (single) or $250,000 (married filing jointly). Those thresholds are not indexed for inflation.⁹ A large inherited-stock sale can push you across the line for the year.

If you sell at a loss, that loss offsets capital gains dollar for dollar. Excess losses deduct up to $3,000 against ordinary income each year ($1,500 if married filing separately), and any remainder carries forward indefinitely.⁸ Watch the wash sale rule: buying the same or a substantially identical stock within 30 days before or after a loss sale disallows the loss and adds it to the basis of the replacement shares.

Tax on Dividends While You Hold the Shares

Any dividends the inherited stocks pay are taxable in the year you receive them, separately from any eventual capital gains tax. Your brokerage sends a Form 1099-DIV each year showing the amounts and their categories.¹⁰

Most dividends from U.S. companies are qualified dividends, taxed at the same 0%, 15%, or 20% rates as long-term capital gains.⁸ Non-qualified (ordinary) dividends are taxed at your regular income tax rate. The 3.8% net investment income tax can apply to dividends as well when your income is above the thresholds noted above.⁹

Stocks Inside an Inherited IRA or 401(k) Work Differently

Everything above assumes the stocks were in a regular brokerage account. Stocks held inside an inherited traditional IRA or 401(k) do not receive a stepped-up basis. When you take distributions, the money comes out as ordinary income at your regular tax rate, regardless of how long the shares were held. There is no long-term capital gains rate and no step-up.

For most non-spouse beneficiaries who inherited the account after 2019, the IRS requires the entire account to be emptied by December 31 of the year containing the tenth anniversary of the original owner’s death.¹¹ A surviving spouse has more flexibility, including rolling the inherited IRA into their own.

Inherited Roth IRAs also fall under the ten-year rule for most non-spouse beneficiaries, but qualified distributions come out tax-free because the original owner already paid income tax on the contributions.¹²

Reporting a Sale to the IRS

Report each sale of inherited stock on Form 8949, listing the proceeds, your stepped-up cost basis, and the sale date. In the “date acquired” column, write “INHERITED” instead of a date. Inherited stock sales go in Part II of the form, which covers long-term transactions.¹³

Totals from Form 8949 flow to Schedule D, which nets your gains and losses for the year, and that figure carries to Form 1040.¹⁴ Separately, if you inherit more than $100,000 in stocks or other assets from a foreign estate or nonresident alien, you also have to file Form 3520 as an information return; the penalties for missing it are steep.¹⁵

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Internal Revenue Service. Gifts and Inheritances
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Internal Revenue Service. Whats New – Estate and Gift Tax
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Internal Revenue Service. Estate Tax
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Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
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Office of the Law Revision Counsel. 26 US Code 2032 – Alternate Valuation
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Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
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Office of the Law Revision Counsel. 26 US Code 1223 – Holding Period of Property
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Internal Revenue Service. Topic No 409, Capital Gains and Losses
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Internal Revenue Service. Net Investment Income Tax
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Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions
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Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs)
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Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
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Internal Revenue Service. Instructions for Form 8949
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Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
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Internal Revenue Service. Instructions for Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts