What is the basis for inherited stock?
Understanding the basis for inherited stock is crucial for individuals who have received shares through inheritance. The basis, also known as the cost basis, refers to the value assigned to inherited stock for tax purposes. This value plays a significant role in determining the capital gains or losses when the inherited shares are sold. In this article, we will explore the factors that contribute to the basis of inherited stock and how it affects taxation.
The basis of inherited stock is typically determined by the fair market value (FMV) of the stock on the date of the original owner’s death. This value is then used as the new basis for the继承人. There are a few exceptions to this rule, which we will discuss later in the article.
When the original owner held the stock for more than one year before passing away, the inherited stock is considered a long-term capital asset. In this case, the basis of the inherited stock is generally the higher of the FMV on the date of death or the original owner’s basis. This ensures that the继承人 benefits from any appreciation in the stock’s value that occurred during the original owner’s lifetime.
On the other hand, if the original owner held the stock for one year or less before death, the inherited stock is considered a short-term capital asset. In this scenario, the basis of the inherited stock is the lower of the FMV on the date of death or the original owner’s basis. This rule is designed to prevent the继承人 from benefiting from the appreciation of the stock that occurred during the original owner’s short-term holding period.
There are a few situations where the basis of inherited stock may be adjusted. One such situation is when the original owner had a basis in the stock that was lower than the FMV on the date of death. In this case, the inherited stock’s basis is increased to the FMV on the date of death. Another situation is when the original owner received the stock as a gift. In this case, the inherited stock’s basis is the same as the basis of the donor.
It is important to note that the basis of inherited stock affects the capital gains tax rate. When the inherited stock is sold, the difference between the selling price and the basis is subject to capital gains tax. The tax rate depends on whether the stock is considered a long-term or short-term capital asset.
In conclusion, the basis for inherited stock is a critical factor in determining the capital gains or losses when inherited shares are sold. The basis is typically determined by the FMV of the stock on the date of the original owner’s death, with some exceptions and adjustments. Understanding the basis of inherited stock is essential for individuals who have received shares through inheritance to properly manage their tax liabilities.
