Inherited Stock Gets Tax Reset: The IRS Rule That Eliminates Capital Gains

If you've ever inherited a stock portfolio, a rental property, or even a single share of grandma's old utility company, the IRS hands you a quiet gift most heirs never notice. It's called the step-up in basis, and it can wipe out decades of capital gains tax in a single moment.

What Is the Step-Up in Basis Rule?

When you inherit an asset, its cost basis—the original price paid to acquire it—is reset to the asset's fair market value on the date of the original owner's death. This means any appreciation that occurred during the original owner's lifetime is not subject to capital gains tax when you later sell the asset.

Illustrative Example

Suppose your grandmother bought a share of Coca-Cola (ticker: KO) at $10 per share 30 years ago, and at her death the share was worth $100. If you sell the inherited share at $100, you owe no capital gains tax because the new cost basis is $100. If you sell at $120, you pay tax only on the $20 gain.

Why This Matters for Investors

This rule makes inherited stocks a tax-efficient vehicle for wealth transfer. Investors should keep accurate records of the original cost basis and the market value at the date of death to fully benefit from this rule.