How Do I Avoid Capital Gains Tax on Inherited Stock?

The main way to avoid capital gains tax on inherited stock is the stepped-up basis: federal law resets the cost basis of inherited shares to their fair market value on the date the previous owner died, which wipes out every dollar of appreciation that built up during the decedent’s lifetime.¹ Receiving the shares itself is not a taxable event, because inherited property is excluded from gross income.² Sell soon after inheriting and your taxable gain is usually close to zero. Hold longer and you only owe tax on growth that occurs after the death date, and there are several ways to reduce or eliminate even that.

How the Stepped-Up Basis Erases Lifetime Gains

Every investment has a cost basis, the starting number the IRS uses to measure gain or loss when you sell. For stock you buy yourself, that’s what you paid. For stock you inherit, the basis is reset to the fair market value on the day the previous owner died, regardless of what they originally paid.¹

Suppose your parent paid $10 a share for stock worth $100 a share on the date they died. That $90 of growth was never taxed during their lifetime. Your new basis is $100, not $10. Sell right away at $100 and your gain is zero. The $90 in lifetime appreciation is gone from the tax rolls for good. This happens automatically under the law; you don’t have to elect it or file anything special to claim it.

Getting the Date-of-Death Value Right

The step-up is only as good as the number you use, so pinning down the fair market value on the death date matters. For publicly traded stock, the IRS defines fair market value as the average of the highest and lowest selling prices on that trading day.³

If the person died on a weekend or holiday when markets were closed, you take a weighted average of the mean sale prices on the nearest trading day before death and the nearest trading day after, weighting each inversely by how many trading days separate it from the death date.³ For a Sunday death, if Friday’s mean price was $20 and Monday’s was $23, the fair market value works out to $21.50.

Save the historical pricing data for the relevant dates. If the IRS questions your basis years later, you need to be able to prove the number.

The Alternate Valuation Date

The estate executor has a second option: valuing all estate assets six months after the death rather than on the death date.⁴ This matters when markets fall sharply after someone dies, because a lower valuation cuts the gross estate and becomes your new stepped-up basis.

Two catches. The executor can only elect this if it reduces both the gross estate and the estate tax owed.⁴ And if the stock was sold or distributed to you during that six-month window, the value locks in on the date of sale or distribution instead of at the six-month mark. It’s an all-or-nothing choice for the entire estate.

The Community Property Double Step-Up

Married couples in community property states get an extra benefit worth flagging. In a common-law state, when one spouse dies, only the deceased spouse’s half of jointly held stock gets stepped up. The surviving spouse’s half keeps its original basis.

In the nine community property states, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, both halves of the stock reset to fair market value when one spouse dies. The entire position gets a new basis, not just the deceased spouse’s share. For a couple holding stock bought decades ago at $20 that’s now worth $200, this double step-up erases the unrealized gain on the full holding. At least half the community property interest has to be includible in the deceased spouse’s gross estate for the rule to apply.⁵

The Tax Rate When You Do Sell

Sell inherited stock and you owe capital gains tax only on the difference between the sale price and your stepped-up basis. Sell below basis and you get a deductible loss.

Inherited stock counts as a long-term holding automatically, even if you sell it the day after you receive it. The law specifically treats property acquired from a decedent as held more than a year regardless of the actual holding period.⁶ You get the lower long-term rates by default.

Those long-term rates are 0%, 15%, or 20%, based on your total taxable income. For 2026:⁷

0% rate: taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
15% rate: income above the 0% ceiling up to $545,500 (single), $613,700 (married filing jointly), or $579,600 (head of household).
20% rate: income above the 15% ceiling.

Land in the 0% bracket and you can sell inherited stock with post-death gains and owe nothing in federal capital gains tax. Even at 15%, the tax is well below what ordinary income would cost.

Higher earners also face a 3.8% net investment income surtax on capital gains once modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).⁸ Those thresholds don’t adjust for inflation. A large sale can push you across the line even if your regular income sits below it, taking someone in the 20% bracket to an effective 23.8%.

Reporting the Sale Without Overpaying

Sales get reported on Form 8949, which feeds Schedule D.⁹ Because inherited property is automatically long-term, the transaction goes in Part II. Write “INHERITED” in column (b) for the date acquired.

Which box you check at the top of Part II depends on what your broker reported. Most brokers don’t have the correct stepped-up basis, because nobody sent them the death-date valuation. If your 1099-B shows basis was not reported to the IRS, check box E (or box F if you got no 1099-B at all). If the broker reported a basis but used the deceased owner’s original purchase price, check box D and use code “B” in column (f) to signal that you’re correcting the basis.⁹ Enter the correct stepped-up basis in column (e).

This is where people overpay. Accept the broker’s 1099-B without correcting it and the IRS calculates your gain using the original purchase price, which can inflate the tax bill by a lot. Always verify the basis on your 1099-B before filing.

Cutting Down the Post-Death Gain

The step-up handles lifetime appreciation, but stock that keeps rising after the death date builds new taxable gains. Several moves can reduce or eliminate that piece.

Gifting to Lower-Income Family Members

If a family member’s taxable income sits within the 0% long-term capital gains bracket, they can sell the stock and owe no federal capital gains tax. When you gift stock, the recipient takes your basis (the stepped-up basis you inherited), so the gift itself doesn’t trigger a gain. The 2026 annual gift tax exclusion lets you give up to $19,000 per recipient with no gift tax reporting requirement.¹⁰

Watch the kiddie tax. Gift appreciated stock to a child under 19, or a full-time student under 24 who doesn’t provide more than half their own support, and unearned income above $2,700 gets taxed at the parent’s rate.¹¹ That defeats the purpose of shifting the gain. The strategy fits adult family members with genuinely low income.

Donating Shares Directly to Charity

Donate appreciated inherited stock directly to a qualified charity and you avoid the capital gain entirely, because you never sell. You can also generally claim an itemized deduction for the full fair market value of the donated shares, not just your basis. Zero capital gains tax plus a full-value deduction makes this one of the most tax-efficient forms of giving.

The word that matters is “directly.” Sell first and donate cash and you realize the gain and owe tax. Transfer the shares themselves.

Offsetting With Capital Losses

If other investments have lost value, sell them in the same year and the losses cancel gains dollar for dollar. When losses exceed gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately) and carry the rest forward to future years indefinitely.¹²

Spreading Sales Across Tax Years

Selling a large inherited position all in one year can push you into a higher capital gains bracket or trigger the 3.8% net investment income tax. Selling in installments across two or more tax years keeps each year’s income in a lower band, potentially in the 0% or 15% bracket.

What Doesn’t Get a Step-Up

Not everything you inherit qualifies for a stepped-up basis. Traditional IRAs and 401(k)s don’t get one; those accounts were funded with pre-tax dollars, and withdrawals are taxed as ordinary income to whoever receives them.¹ Bank accounts, certificates of deposit, annuities, and pensions don’t get one either. The step-up is built for appreciated capital assets in taxable accounts.

Trust-held stock can go either way. Shares in a revocable (living) trust the deceased controlled generally qualify, because the assets remain part of the taxable estate. Shares in an irrevocable trust designed to remove assets from the estate may not. The trust document controls the answer, so if inherited stock came through a trust, check with a tax professional before assuming a step-up applies.

1
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
2
Office of the Law Revision Counsel. 26 U.S. Code 102 – Gifts and Inheritances
3
eCFR. 26 CFR 20.2031-2 – Valuation of Stocks and Bonds
4
Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation
5
Internal Revenue Service. Publication 555 – Community Property
6
Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property
7
Internal Revenue Service. Rev. Proc. 2025-32 – Inflation Adjusted Items for 2026
8
Internal Revenue Service. Topic No. 559 – Net Investment Income Tax
9
Internal Revenue Service. Instructions for Form 8949 (2025)
10
Internal Revenue Service. Frequently Asked Questions on Gift Taxes
11
Internal Revenue Service. Topic No. 553 – Tax on a Child’s Investment and Other Unearned Income
12
Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses