# How to Pay Capital Gains Selling Inherited Stock

Inheriting stock isn’t a taxable transaction, meaning you don’t pay capital gains when you receive the inherited stocks. Just as with the stocks you purchase, you may have to pay capital gains when selling inherited stock at a market price that exceeds your basis. This tax basis generally reflects your cost, but when you inherit the shares, basis is calculated a little differently.

## Inherited Stock Gets Stepped-up Basis

For the stock you inherit, the Internal Revenue Service generally requires that you use the shares’ fair market value on the date of the decedent’s death as your basis. This is referred to as a stepped-up basis. because the decedent’s original acquisition cost -- which can be much lower than your basis -- is ignored.

If an estate tax return is required for the money and property the decedent leaves behind and the executor elects an alternate valuation date, you can use the fair market value of the stocks on the alternate date as your basis instead. The alternate valuation date is six months from the date of the decedent’s death or, if you receive the shares earlier, on the actual date of receipt.

## Fair Market Value of Inherited Stocks

The IRS allows you to compute fair market value as the average of the highest and lowest price the stock trades at on the valuation date. If the valuation date falls on a day the markets are closed, you must use the weighted average of the fair market values on the two closest trading days immediately before and after the valuation date. For example, suppose the valuation date falls on a Saturday, but the fair market value the day before is \$10 and increases to \$13 after the close of

the next trading session on Monday. Since Friday is one day before the valuation date, the \$10 value is weighted once, whereas, the \$13 price is weighted twice, because it’s two days after the date. Your tax basis in the inherited stock in this example is \$12, calculated as follows:

\$12 = (10 + 13 + 13) / 3 days

## Holding Period

How long taxpayers own stocks before selling them governs whether the resulting gain is treated as short term or long term. Short-term gains are taxed as ordinary income and cover stocks you hold for one year or less before selling, while long-term gains are subject to much lower rates of tax and apply to shares you own for more than one year.

Inherited stocks, however, are always treated as long-term capital assets regardless of how much time passes between your inheritance and a subsequent sale of the stock. As of this writing, long-term gains are tax free if you’re in the 10 percent or 15 percent tax brackets. A 15 percent capital gains rate applies if you’re in the 25, 28, 33 or 35 percent brackets, and it increases to a top rate of 20 percent when any of the income on your return is subject to the highest 39.6 percent bracket.

## Reporting Capital Gains and Losses

You need to report the sales of inherited stock on your tax return covering the year in which the sales take place. The details of each transaction, such as your basis in the stock and its selling price, for example, are entered on Form 8949, which separately states the gain or loss from each transaction. You will then need to transfer the totals from your 8949 onto a Schedule D before attaching both forms to your 1040.

Source: ehow.com

Category: Bank