What is Inherited Stock

Inherited stock is a stock that an individual obtains through an inheritance, after the original holder has died. The increase in value of the stock, from the time the deceased bought it until their death, does not get taxed. For the purposes of the the inheritor’s income tax liability, they will only be liable for the capital gains during their own lifetime.

BREAKING DOWN Inherited Stock

Inherited stock, unlike gifted securities, is not valued at its original cost basis. Cost basis is a term used by tax accountants to refer to the original value of an asset. When someone inherits a stock, the cost basis of that stock is stepped-up to the value at the date of inheritance. From the point of view of the federal government, stepped-up cost basis is an expensive provision of the tax code, which benefits wealthier tax payers. Elimination of stepped-up cost basis, therefore, is a popular target for politicians hoping to raise tax revenue.

History of Inherited Stock

The United States has taxed the transfer of wealth from a deceased person’s estate to the person’s heirs since the passage of the 1916 Revenue Act, which expanded on the recently inaugurated income tax, in order to pay for the cost of America’s entry into World War One. Supporters of taxing estates at the time argued that the estate tax is a necessary tool not just for raising revenue, but to prevent the concentration of wealth in the hands of too few individuals. Opponents of taxing estates have labeled this practice the Death Tax, arguing that it’s unfair to tax someone’s wealth after it’s already been taxed as income. 

The taxation of inherited stock falls into this debate over the taxation of inheritances, but it is also involved in the debate over how to tax capital gains. For practical purposes, governments only tax capital gains after the underlying asset has been sold, whereas income tax is due every year. Proponents of the stepped-up basis exemption argue that capital gains should be taxed more lightly than income, to promote investment in the economy, and that taxing capital gains at death would lead to forced sales of assets. 

Inherited Stock and Estate Planning

Because your heirs will not have to pay tax on capital gains on stock you have not sold at the time of your death, it is wise to hold a large portion of the assets you plan to bequeath to your heirs in equities.