Key Takeaways
- Inherited stock involves stock investments that are passed on to heirs after the death of the giver.
- For tax purposes, the cost basis of inherited stock is typically the value at the time of the giver’s death, not the original purchase value.
- Inherited stock is always taxed at long-term capital gains rates regardless of the length of ownership by the giver or recipient.
Definition and Examples of Inherited Stock
Inherited stock means the equities were passed on to another person after the death of the giver and differs from gifted stock, which involves shares provided as a gift during one’s lifetime. Inherited stock specifically refers to the passing on of individual securities.
For example, a parent might own shares in a blue-chip stock and want to eventually give those shares to their child, so they specify this in their will. After the parent passes away, the child receives these shares, which would make those shares inherited stock.
Transferring assets from one person to another can have varying tax consequences, which is what makes inherited stock differ from gifted stock and other types of transfers.
Note
With inherited stock, the inherited assets are typically taxed based on the value of the stock at the time of the previous owner’s death, rather than when the stock was first purchased. However, consult with your tax professional or estate executor if any alternate dates are applicable.
Note that there are two taxation concepts here: (1) Taxes on the estate of the person bequeathing the stock to the recipient (i.e., taxes charged to the estate of the person passing away); and (2) Taxes due when the recipient of the inheritance sell the stock, in which case the basis is the value used in calculating the estate taxes.
The recipient would pay taxes when selling the inherited stock based on this step-up cost basis, not the value at the time of receiving the inheritance.
In contrast, suppose a parent gifts their child stock while the parent is still alive. The stock then rises in value, so the child sells the stock. Unlike inherited stock, the capital gains taxes would likely be based on what the parent originally paid for the stock, not the value at the time the child received the stock.
In some cases, an investor might pass on stock within a retirement account, but retirement accounts are a whole different ballgame regarding taxes and inheritance rules.
How Does Inherited Stock Work?
Inherited stock works by having an investor pass on stock to an heir, such as by specifying this wish as part of their estate plan. After the original investor passes away, the heir receives the inherited stock and can use it as they wish.
Note
If the heir does eventually sell the inherited stock, the taxes would be based on long-term capital gains rates, regardless of how long they or the original investor owned the stock.
These long-term rates typically save investors money, as the top rate is 20% and the standard rate is 15%. In contrast, short-term capital gains are treated as ordinary income, where the top tax rate is 37%.
Perhaps more importantly, these long-term capital gains rates for inherited stock are based on the value of the stock at the time of the benefactor’s death, not the original purchase price.
Suppose a parent who provided inherited stock purchased the shares for $1,000 a couple of decades ago. The value rose to $10,000 by the time of the parent’s death. After inheriting the stock, the child then sells the assets a year later when the value reaches $12,000. The child’s long-term capital gains taxes would be based on a $2,000 gain ($10,000 grew to $12,000) instead of $11,000 (with the original $1,000 growing to $12,000).
At the standard 15% capital gains tax rate, that means the recipient of the inherited stock would owe $300 instead of $1,650 if the tax had been applicable based on the price at which the original investor had purchased the stock.
What Inherited Stock Means for Individual Investors
If you’d like to pass on assets to others such as family or friends, consider the tax consequences and timing. While you might want to gift stock to your children now, that could lead to more taxes than if you allowed them to inherit stock after you pass.
For individual investors who received or expect to receive inherited stock, keep these tax rules in mind. If a great opportunity to sell comes within a year of receiving the stock, for example, you might decide to take advantage of that since you could pay long-term capital gains rates, rather than needing to wait for a full year of ownership.
FAQs
What Is Inherited Stock? As the name suggests, inherited stock refers to stock an individual obtains through an inheritance, after the original holder of the equity passes away. The increase in value of the stock, from the time the decedent purchased it until their death, does not get taxed.
Should you sell or keep inherited stock? ›
If you sell the stock immediately, you won't owe any taxes; if you hold on to it, you'll only owe taxes (or be eligible to claim a loss) on the difference between $250 and the sale price.
How do you cash out inherited stocks? ›
Once the stock is in the beneficiary's brokerage account, they can sell the stock by placing a sell order through the brokerage. The beneficiary can choose to sell the stock all at once or to sell it in smaller portions over time.
How do I avoid taxes on inherited stocks? ›
Stocks and cash: Inherited cash generally isn't taxable unless the estate exceeds the applicable estate or inheritance taxes. Stocks also aren't taxable unless they are subject to estate or inheritance taxes but could result in capital gains taxes when you sell them.
What happens when you inherit shares? ›
Whilst there is no tax payable when your daughter inherits the shares, she is effectively inheriting a capital gains tax liability that will need to be paid at some point in the future, when she decides to sell these shares.
What does inherited stock mean? ›
What Is Inherited Stock? As the name suggests, inherited stock refers to stock an individual obtains through an inheritance, after the original holder of the equity passes away. The increase in value of the stock, from the time the decedent purchased it until their death, does not get taxed.
What is the 6 month rule for inherited stock? ›
If the executor files an estate tax return, they could use an alternate valuation date of up to 6 months from the date of death. When you sell an inherited asset for more than the stepped-up cost basis, it would be counted as a long-term capital gain for tax purposes.
Do I have to pay taxes on an inherited brokerage account? ›
You will have to include the interest income from inherited cash and dividends on inherited stocks or mutual funds in your reported income. For example: Any gains when you sell inherited investments or property are generally taxable, but you can usually also claim losses on these sales.
How do I report inherited stock? ›
You must file a Form 1099 with the IRS (the same type of Form 1099 you received). You must also furnish a Form 1099 to each of the other owners. On each new Form 1099, list name of SSN as the payer and the other owner, as the recipient.
How do I transfer inherited shares into my name? ›
To facilitate a transfer, the executor will need a copy of the decedent's will or a letter from the probate court confirming that the beneficiary in question is indeed the person entitled to receive the shares. The executor must then send these documents to a transfer agent, who can complete the transfer of ownership.
The U.S. does not have a federal inheritance tax, but some states impose one. An inheritance tax is not the same as an estate tax. Beneficiaries are responsible for paying inheritance taxes, whereas estate taxes are taken out of the estate itself.
Do I need to report inheritance money to the IRS? ›
If you are a beneficiary of property or income from the estate, you could be impacted on your federal income tax return. You must report any income you receive passed through from the estate to you and reported on a Schedule K-1 (1041) on your income tax return.
What is considered a large inheritance? ›
Inheriting $100,000 or more is often considered sizable. This sum of money is significant, and it's essential to manage it wisely to meet your financial goals. A wealth manager or financial advisor can help you navigate how to approach this.
Should I cash out inherited stocks? ›
Once you officially inherit the stock, you can sell your shares at any time, similar to how you would cash out any other stock or asset. Note that selling inherited stock may have tax implications depending on your timeline. Consult with a tax professional to see the impact of selling an inherited stock.
Are stocks subject to inheritance tax? ›
All intangible property of a resident decedent, including stocks, bonds, bank accounts, loans receivable, etc., is also taxable regardless of where it is located at the time of the decedent's death.
How do you transfer shares by inheritance? ›
How to Transfer Shares to a Demat Account Online -
- Notarized copy of the death certificate of the shareholder.
- Transmission/ dematerialization form.
- Dematerialization request form (2 copies)
- Original share certificates.
- Self-attested copy of your PAN.
For example, if there is a market downturn, you don't want to sell your shares at this time and lock-in losses. Emergency funds allow you to focus on investing for the long term. Most general guides advise three to six months of living expenses in cash before you start investing.
Is it better to sell shares or keep them? ›
It depends. If a stock price plunges because of a significant and long-term change in the company's outlook, that's a good reason to sell. Virtually all stocks, even the bluest of the blue chips, experience temporary setbacks and then move back upwards. Averaging down in such cases is a strategy to consider.
Should I keep inherited money separate? ›
Keep it separate.
In some cases, it may not be possible to do a prenuptial or postnuptial agreement. Therefore it is critical that any inheritance, or other gifts you receive, be kept separate from any marital funds.
Should I sell stocks that are losing money? ›
An investor may also continue to hold if the stock pays a healthy dividend. Generally, though, if the stock breaks a technical marker or the company is not performing well, it is better to sell at a small loss than to let the position tie up your money and potentially fall even further.
