When you inherit stock, its tax basis resets to the shares’ fair market value on the date the previous owner died. This is the stock step-up in basis at death, and it’s set by Section 1014 of the Internal Revenue Code.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Every dollar the stock appreciated during the original owner’s lifetime becomes tax-free to you. If they bought shares at $10 and the stock was worth $100 on the day they died, your basis starts at $100. Sell at that price and you owe no capital gains tax.
Your basis is the number the IRS subtracts from your sale price to figure your gain. Reset it high, and the taxable gain shrinks or disappears. That is the entire benefit, and it’s why inherited stock is treated very differently from stock given to you while the owner was alive. A lifetime gift generally carries the giver’s original low basis along with it; death wipes that history out.
How the New Basis Is Set
For publicly traded stock, fair market value on the date of death is the average of the highest and lowest selling prices that day.2eCFR. 26 CFR 20.2031-2 – Valuation of Stocks and Bonds If shares traded between $48 and $52, the valuation is $50. If the death fell on a weekend or holiday, the IRS uses a weighted average of the trading prices on the closest trading days before and after. The executor or the decedent’s brokerage can pull the numbers.
The Alternate Valuation Date
The executor can elect to value all estate assets six months after the date of death instead. This alternate valuation date under Section 2032 exists to protect estates when markets drop sharply after someone dies.3Office of the Law Revision Counsel. 26 USC 2032 – Alternate Valuation Two conditions have to be met: the election must decrease both the total gross estate value and the estate tax owed. If the executor sells the stock before the six-month mark, the sale-date value controls.
As an heir, ask which date the executor used. If the alternate date was elected, your basis is the six-month value, not the date-of-death value.
When the Stock Was Worth Less at Death
The adjustment runs both directions. If the shares were worth less on the date of death than what the original owner paid, your basis steps down to that lower value. Original owner paid $80, stock was worth $50 at death: your basis is $50. You cannot claim the $30 decline that happened during their lifetime as a loss.
Losses that occur after you inherit are yours. Sell for less than your stepped-up (or stepped-down) basis and you have a capital loss you can use against other gains, with up to $3,000 per year ($1,500 if married filing separately) deductible against ordinary income and the rest carrying forward.
How Ownership Structure Changes the Answer
How much of the stock steps up depends on how it was owned and, for married couples, on state law.
Community Property
If the stock was community property, both halves get a full step-up when one spouse dies. Section 1014(b)(6) gives the surviving spouse’s half a new basis equal to fair market value at death, matching the decedent’s half.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent A couple with an $80,000 basis in stock worth $200,000 at the first death ends up with a $200,000 basis on the whole holding.4Internal Revenue Service. Publication 555 (12/2024), Community Property Alaska, Florida, Kentucky, South Dakota, and Tennessee now allow married couples to create community property trusts to access this full double step-up.
Joint Tenancy Between Spouses in Common-Law States
When spouses hold stock as joint tenants with right of survivorship in a common-law state, only 50% of the value is included in the first spouse’s estate.5Office of the Law Revision Counsel. 26 USC 2040 – Joint Interests The survivor gets a step-up only on that half. Same $200,000 account with the same $80,000 basis: the new blended basis is $140,000 — $100,000 for the decedent’s stepped-up half plus $40,000 for the survivor’s original half.
Joint Ownership Between Non-Spouses
When non-spouses own stock jointly, the full value is presumed to belong to the decedent’s estate unless the surviving co-owner can prove they contributed their own funds to buy their share.5Office of the Law Revision Counsel. 26 USC 2040 – Joint Interests Only the portion actually included in the estate gets a step-up. Contribution records matter.
The One-Year Gift-Back Trap
If you gave appreciated stock to someone within a year before they died and then inherited that same stock back, you do not get a step-up. Your basis is whatever the decedent’s adjusted basis was immediately before death, which is usually the low basis you started with.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
The rule also applies when the stock passes to your spouse instead of directly back to you, and when the estate sells the shares and distributes the proceeds to you.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent The stock must end up with someone other than the original donor or their spouse for the basis reset to apply.
What Doesn’t Step Up
Not everything you inherit gets this treatment. The big exception is income in respect of a decedent — income the deceased earned or was entitled to but never paid tax on. Traditional IRAs and 401(k) accounts are the most common. Contributions went in pre-tax, so there’s no basis to reset. Distributions to you are taxed as ordinary income at your rate.6Internal Revenue Service. Publication 559 (2025), Survivors, Executors, and Administrators
Other items in this category include certain annuities, unpaid salary or bonuses owed to the decedent, and unredeemed U.S. savings bonds with accumulated untaxed interest. Inherited stock held outside these accounts still gets the step-up. Assets held in a revocable living trust generally qualify because they’re included in the decedent’s gross estate. Irrevocable trusts depend on whether the trust assets are included in the estate.
Selling the Shares and Reporting the Sale
Once you know your stepped-up basis, the calculation is straightforward: sale price minus basis equals gain or loss.
Inherited stock gets one more break. Any gain is automatically treated as long-term, even if you sell the day after you inherit. Section 1223(9) assigns inherited property a holding period of more than one year for any sale within the first year, and after that you’ve held it long enough on your own.7Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property So the sale always qualifies for long-term capital gains rates.
For 2026, those rates are:
- 0% on taxable income up to $49,450 (single) or $98,900 (married filing jointly)
- 15% on taxable income up to $545,500 (single) or $613,700 (married filing jointly)
- 20% above those thresholds
Higher earners may also owe the 3.8% net investment income tax on top. That surtax applies when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for joint filers, and the thresholds are not indexed for inflation.8Internal Revenue Service. Net Investment Income Tax
You report the sale on Form 8949 and Schedule D of Form 1040. Mark the property as inherited so the long-term treatment applies regardless of your actual holding period.
Documentation You Need to Keep
You need records proving the fair market value on the valuation date and your right to inherit. Brokerage statements, the executor’s records, or a Schedule A from Form 8971 all work.9Internal Revenue Service. Instructions for Form 706 Keep them permanently. There is no statute of limitations on proving basis if the IRS questions your reported gain, and without proof the IRS can treat your basis as zero.
When Form 8971 Applies
If the estate is required to file Form 706, the executor must also file Form 8971 with the IRS and send each beneficiary a Schedule A listing the reported value of the assets they received. The deadline is 30 days after the Form 706 due date or 30 days after the actual filing date, whichever comes first.10Internal Revenue Service. Instructions for Form 8971 and Schedule A
For 2026, the federal estate tax exemption is $15,000,000, so Form 706 is only required when the gross estate plus adjusted taxable gifts exceeds that amount.11Internal Revenue Service. What’s New – Estate and Gift Tax Most estates fall below this threshold and will not produce a Form 8971. The executor should still document the date-of-death values and share them with beneficiaries.
The Consistent Basis Requirement
When the estate does file Form 706, you cannot claim a basis higher than the value the executor reported. Section 1014(f) caps your basis at the estate tax return value.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Reporting a higher basis on your personal return exposes you to a 20% accuracy-related penalty on the resulting underpayment.12Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments If you’re waiting on a Schedule A from the executor, chase it down — your reporting depends on it.