Taxes on Cashed-Out Stocks for Inheritance

by Jane Meggitt

Inheriting stocks can be a windfall, but cashing them out usually involves possible payment of capital gains taxes. Determining the basis of inherited stock is very simple, and doesn't require going any further back in stock purchase history than the day the benefactor died. Even if the stock shares were originally purchased over time, only that one date matters for Internal Revenue Service purposes.

Determing the Cash Basis

Any taxes you have to pay on inherited cashed-out stocks depend on the cash value of the securities at the time of the decedent's death. If the executor did not provide you with the fair market value of the securities as of the date of death, contact the executor or estate attorney for this information. Even if the decedent held the stocks for years and the value has greatly appreciated, the basis at his death steps up to current valuations. If the decedent sold the stocks in his lifetime, the cash basis would be the price at the time of purchase.

Losses and Gains

Calculate any gains and losses when selling inherited stock by determining the value of the shares on the day the decedent died, and the value as of the date you sold them. For example, if the shares had a fair market value of $25,000 on the day the original owner died, and you sold them for $30,000 after inheritance, you will owe taxes on the $5,000 gain. This holds true even if the decedent only paid $2,500 for the shares when purchased. By the same token, if you sell the inherited shares for $20,000, you may claim a $5,000 loss. Sell the shares for $25,000 and you owe nothing in capital gains taxes.

Inheritance Tax

It's possible that you may have to cash out inherited stocks to pay any inheritance tax owed. Whether or not you must pay inheritance tax depends on the state in which the decedent resided, as not all states impose inheritance tax. It may also depend on your relationship to the decedent. In all states, a spouse is not subject to inheritance tax, but some states do levy a tax on non-lineal estate beneficiaries. An inheritance tax is paid by the inheritor, while an estate tax is levied on the assets before distribution to beneficiaries.

Deaths in 2010

If you inherited stock from someone who died in 2010, the IRS regulations may be somewhat different. That was a year in which there was no federal estate tax owed no matter how large the estate. The IRS allows the cash basis for 2010 estates to be either the traditional fair market value at the decedent's death or the actual basis of the decedent. If the executor used the later basis, this could result in paying more capital gains tax when selling the inherited stocks. Check with the executor or the estate lawyer to see which cash basis was used.