How do you account for stocks you inherit, for tax purposes? It can be confusing when you're lucky enough to inherit some stocks. After all, you probably don't know the cost basis of the shares, or even if you have a gain or loss.

First off, understand that there's a big difference between a gift and an inheritance (received from someone's estate). With a gift of appreciated stock or property, your basis (or cost, for tax purposes) is the same basis that the person who gave you the gift originally had. So with gifts, you need to attempt to trace the cost all the way back to the person who originally owned it and gave it to you. This can sometimes be difficult. With an inheritance, you get what is called a stepped-up basis for tax purposes. Your basis (i.e., cost) is established at the fair market value of the stock on the date of death of the donor.

The estate's tax return should disclose the value of the stock at date of death. Alternatively, if you know the date, you can get the stock price online at various sources, or even by calling your broker or the company's investor relations department and asking. Once you determine the value, back up your findings with a letter from the broker or the shareholder relations department. You'll need that information just in case the IRS wants to double-check (read: audit) your tax return.

The last time we ran this article, back in 2002, Joel B. Kantor, a certified financial planner, wrote in with an addendum. He said:

"You left out one very important bit of good news. That is: with the step-up in basis, you also receive a holding period step-up, if you will, to long-term. In other words, you can sell the inherited stock anytime after you inherit it and have the gain be taxed as long-term capital gain. This is also helpful for those wanting to make a charitable contribution because you always (almost always) want your gift of appreciated stock to be long-term."

Learn more about taxes in our Tax Center and at the IRS website.