How to Calculate Cost Basis for Inherited Stock

Knowing how to calculate the cost basis on the inherited stock could save you thousands.

By Keith Noonan – Updated Nov 5, 2024 at 11:49 AM

Key Points

Inherited stocks get a basis reset to market value at the owner's death, reducing capital gains tax on future sales.
Heirs cannot use losses prior to the original owner's death to offset other investment gains.
Understanding and applying the basis step-up rule can significantly cut heirs' tax liabilities.

Paying taxes on gains from long-term investments can be a major hurdle for investors. Yet the tax law actually gives heirs a huge tax break -- the ability to reset their cost basis -- when they inherit shares of stock or other investments that have increased in value. This tax law lets you wipe out potential capital gains tax liability entirely, which can cut thousands of dollars off your tax bill. Below, we'll go through how to figure your cost basis on inherited stock.

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Reasoning behind the cost basis step-up

The IRS began taxing estates with the passage of the 1916 Revenue Act. This change to the tax code was primarily meant to help pay for World War I by supplementing the funds generated from income tax. However, in addition to creating a new tax to generate more revenue, lawmakers also saw a practical benefit to allowing for a stepped-up basis on inherited wealth.

As anyone who has invested for a long time can attest, keeping track of the cost basis for your stocks can be an ongoing nightmare. Keeping records of every purchase and reinvestment over time is a monumental task. When you have to rely on someone else's records dating back to before you even took ownership of the inherited stock, that task can become almost impossible. In addition, because assets in a person's estate are potentially subject to estate taxes, the basis step-up eliminates the possibility of double taxation.

Figuring out the basis

If a substantial time has passed since you inherited the stock, you'll need to find prices for the shares at the date of death. Fortunately, those prices are readily available from financial news sources and from company investor relations departments. If a tax return was filed for the estate and an alternative valuation date was chosen, those values should be used as the stepped-up basis instead.

In addition, it's important to note that if you've enrolled in an automatic dividend reinvestment plan (available via most major brokerages), you may have purchased additional shares after you inherited them. It's crucial to understand that the cost basis of the inherited shares is separate from the cost basis of the newer shares. If you fail to account properly for both sets of shares, you can end up paying more in capital gains taxes than necessary.

The cost-basis calculation should be the same whether a person inherits stock through a revocable trust or a will. The same holds true for stocks inherited through a brokerage.

Finally, keep in mind that the step-up rules apply only to property that was legally included in the deceased person's estate at death. Gifts of stock that someone gave you while they were still living don't get a step-up. Trusts on your behalf that became irrevocable prior to the death of the creator usually won't get favorable treatment either.

Nevertheless, in most situations involving inherited stock, the basis step-up rules make things a lot simpler and less costly for heirs. Just knowing the rule and using it correctly can save you thousands in unnecessary taxes.

Determining valuation basis for estate taxes

If the value of an estate is large enough to qualify for federal estate taxes, then stocks that are included will be taxed as part of the overall value of the estate. The federal estate tax threshold was raised to $13.61 million per individual and $27.22 million per married couple in 2024. Additionally, the federal estate tax threshold for individuals will be raised to $13.99 million in 2025, and the threshold for married couples will be raised to $27.98 million. This means that stocks won't be taxed as part of an inheritance, provided the overall value of the estate is below those levels.

The vast majority of estates are valued at levels that do not trigger federal estate taxes. However, a valuation basis for included stocks must be used to determine if estates exceed the threshold. Just as with inheriting stocks, the valuation basis of stocks and other equities in the estate is set by their market value on the day of the deceased's passing or the alternate valuation date. While states also have their own estate tax and inheritance tax laws, the standards for determining cost basis are the same.

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About the Author

Keith Noonan is a contributing writer at The Motley Fool covering technology, consumer goods, and other sectors. He holds a bachelor’s degree in English from Boston College.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.