How to Calculate Cost Basis on Inherited Stock (And Why Getting It Wrong Costs Thousands)

Key Takeaways

The IRS step-up in basis resets your cost basis to the fair market value on the date of death, not the original purchase price.
Using the original purchase price instead of the stepped-up value on a $200,000 position could generate a phantom $150,000 taxable gain, costing a taxpayer in the 20% bracket $30,000 in avoidable federal capital gains tax.
Obtain a date-of-death valuation from your broker in writing, confirm whether an alternate valuation date applies, then calculate gain or loss only from that stepped-up figure.
Tool: Run your capital gains tax estimate now →

File Smarter This YearSPONSORED

Stop leaving money on the table. TurboTax finds every deduction automatically.

Interactive Calculator

Full screen

Loading Calculator

calcmoney.io/calculatorsOpen full screen

The Rule That Resets Everything

When you inherit stock, the cost basis does not carry over from the decedent. The IRS resets it. That reset is called a step-up in basis, and it is one of the most valuable provisions in the tax code for wealth transfers.

The stepped-up basis equals the fair market value of the shares on the date of the decedent's death. Every gain that accrued during the original owner's lifetime disappears for tax purposes. You owe capital gains tax only on appreciation that occurs after the date of death.

This rule applies to stocks, mutual funds, ETFs, bonds, and most other capital assets transferred at death. It does not apply to assets inside IRAs, 401(k)s, or other tax-deferred accounts. Those accounts carry their own distribution rules.

How to Find the Correct Stepped-Up Basis

The mechanics are straightforward. The execution requires documentation.

Step 1: Identify the Valuation Date

The default valuation date is the date of death. For most estates, that is the only date you need. However, executors of larger estates may elect an alternate valuation date: exactly six months after the date of death. The alternate date applies only if it reduces both the gross estate value and the estate tax liability. It is not a selective tool. If the executor elects it, it applies to all assets in the estate.

Confirm with the estate's executor or attorney which date governs before you do any calculations.

Step 2: Determine Fair Market Value on That Date

Fair market value for publicly traded stocks is the average of the high and low trading prices on the valuation date. This is not the closing price. It is not the opening price. It is the mean of the daily high and low.

Formula: (Daily High + Daily Low) / 2 = Fair Market Value per Share

If the valuation date falls on a weekend or market holiday, the IRS requires a weighted average of the prices from the trading days immediately before and after. The weighting depends on how many calendar days each trading day represents relative to the non-trading period.

Request this data from your brokerage in writing. Many major custodians will produce a "date-of-death valuation letter" for this purpose. Keep it with your tax records.

Step 3: Multiply by Shares Inherited

Stepped-Up Basis = Fair Market Value per Share x Number of Shares Inherited

That total becomes your new cost basis. Any sale above that figure generates a taxable gain. Any sale below generates a deductible loss.

Worked Example 1: Single Inherited Position

Your mother purchased 500 shares of a technology company in 2008 at $22 per share. Her original cost basis was $11,000. She passed in March 2026. On the date of death, the stock's daily high was $183.40 and the daily low was $179.60.

Fair market value: ($183.40 + $179.60) / 2 = $181.50 per share

Stepped-up basis: $181.50 x 500 = $90,750

You inherit the shares and sell them in August 2026 at $194.00 per share.

Sale proceeds: $194.00 x 500 = $97,000

Taxable gain: $97,000 - $90,750 = $6,250

That $6,250 gain is short-term if you held fewer than 12 months from the date of death, and long-term if you held longer. In this case, five months elapsed between the date of death and the sale, so the gain is short-term and taxed as ordinary income.

Without the step-up, the gain would have been calculated against the original $11,000 basis. That produces a $86,000 gain. The difference in tax liability at a 32% ordinary income rate is more than $24,000.

Worked Example 2: Partial Shares and Multiple Lots

Inherited positions sometimes arrive as fractional shares or across multiple tax lots with different acquisition dates. The step-up applies to all of it equally. The original lot structure is irrelevant.

Your uncle held 1,200 shares of a dividend-paying consumer staples company, acquired in three separate purchases between 2004 and 2018. His blended cost basis was $34.17 per share. He passed in January 2026. Date-of-death valuation comes to $88.20 per share.

Stepped-up basis: $88.20 x 1,200 = $105,840

The executor distributes 600 shares to you and 600 shares to a sibling. Your stepped-up basis for your 600 shares is $88.20 per share, or $52,920 total.

You sell your 600 shares in February 2027 at $95.50 per share.

Sale proceeds: $95.50 x 600 = $57,300

Taxable gain: $57,300 - $52,920 = $4,380

Because you held the shares more than 12 months from the date of death, this qualifies as a long-term capital gain. At the 15% rate, you owe $657 in federal tax on that gain.

Had you mistakenly used the original blended basis of $34.17 per share, your calculated gain would have been $57,300 - $20,502 = $36,798. The federal tax at 15% would have been $5,519.70. The error costs $4,862.70 on a single position.

Community Property States Add a Layer

Residents of community property states face a different calculation. When a spouse dies, both halves of community property receive a step-up, not just the decedent's half. This is the double step-up, and it is significant.

If a married couple held 2,000 shares with a combined original basis of $40,000, and the shares are worth $220,000 at death, the surviving spouse's entire 2,000-share position steps up to $220,000. The original $40,000 basis is gone. Both halves reset.

Community property states include California, Texas, Arizona, Nevada, Washington, Idaho, Louisiana, New Mexico, and Wisconsin. Alaska allows couples to opt in. If you live in one of these states and your spouse has passed, confirm with a tax professional that the full double step-up has been applied before you file.

What Does Not Qualify for a Step-Up

Not every inherited asset benefits from this treatment. Know the exclusions before assuming.

Assets held in traditional IRAs and 401(k)s do not step up. Distributions from inherited retirement accounts are taxed as ordinary income, regardless of how long the original owner held the underlying investments.

Assets transferred via gift before death do not step up at the donor's death. Gifts carry over the donor's original basis, known as a carryover basis. If your parent gave you stock while alive, you inherit their cost basis, not a date-of-death reset.

Annuities inside insurance contracts follow their own rules. The gain inside a non-qualified annuity inherited from a non-spouse beneficiary is taxed as ordinary income.

U.S. savings bonds transferred at death carry specific rules depending on whether they were in the decedent's name alone or jointly held. Consult IRS Publication 550 for the specifics.

Documentation You Need Before You File

Gather these items before your tax preparer asks for them.

A date-of-death valuation statement from the brokerage or transfer agent. This should show the daily high, daily low, and calculated fair market value per share on the valuation date.

A copy of the estate's executor letter or Letters Testamentary. This confirms your legal authority to act on inherited assets.

The estate tax return, Form 706, if one was filed. The values reported on Form 706 must match the basis you claim. Discrepancies trigger scrutiny.

Form 1099-B from your brokerage when you sell. Brokerages frequently report the wrong basis for inherited shares. They default to the original acquisition cost, which is incorrect. Review the 1099-B carefully and correct it on Form 8949 if needed.

The Filing Mechanics: Form 8949 and Schedule D

When you sell inherited shares, report the transaction on Form 8949 with the appropriate short-term or long-term designation. In the "Date Acquired" column, write "Inherited." This signals to the IRS that the step-up rules apply.

Carry the totals to Schedule D. Your gain or loss flows from there to Form 1040.

If the brokerage reported an incorrect basis on the 1099-B, check Box B or Box E on Form 8949 and enter an adjustment in Column G. Include a brief explanation in the associated statement.

Run the Numbers Before You Sell

The difference between the correct and incorrect basis calculation is not academic. On a $300,000 inherited position with a low original basis, the tax error can exceed $40,000 in a single filing year.

Use the CalcMoney income tax calculator to model your specific gain after applying the correct stepped-up basis. Enter your filing status, income, and the capital gain amount. The calculator applies current federal rates and brackets so you see the actual liability before you execute a sale.

Knowing your tax exposure before the trade gives you flexibility. You may choose to spread sales across two tax years. You may use harvested losses elsewhere in your portfolio to offset the gain. You may determine that holding beyond the 12-month mark changes your rate from short-term to long-term and cuts the bill substantially.

The step-up in basis is the law working in your favor. Apply it correctly, document it thoroughly, and calculate the outcome before you act.

Calculate your inherited stock tax liability now →

Featured Partner

FIDELITY