How to Sell Inherited Stock Taxes
Inherited stock is generally valued at the price on the date of the benefactor's death, not the price they originally paid for the stock. This is generally known as a step up in basis. However, it is possible that the stock price has dropped since it was originally purchased, in which case there is a step down in basis. Your basis directly relates to your gains and losses, and therefore affects your tax liability.
How you choose to sell your inherited stock can affect your taxes. Tax implications are different if you sell the stock versus choosing to donate the stock.
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Instructions
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Selling the Stock
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Decide whether or not you should sell the stock. If the stock price has fallen since it was purchased, you may get sentimental and want to hold the stock until it reaches at least the benefactor's original investment. However, you should look at this more pragmatically. Look at this stock as if it were any other investment and determine whether it fits within your risk tolerance and if you believe it to be a good long-term fit.
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Calculate your cost basis. The basis is the market price on the day that the decedent died. You can confirm that price on the date of death either from the valuation of the securities on the tax return for the estate or from a number of online historical stock price sources, such as Yahoo! Finance, if you know the actual date of death.
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Calculate your capital gains or losses--the difference between the basis of the stock and the proceeds from the stock sale. Remember that inherited stock is always considered long term, so your tax liability will never be more than 20% (unless IRS rules on long-term capital gains changes). Losses, if any, may be used to offset other capital gains from the year in which you sell the stock and may be eligible to be carried over into subsequent years if your losses exceed the yearly limit, typically $3,000.
Donating the Stock
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Determine whether you are donating a security at a gain or a loss. The stock basis is the basis on the day the decedent died.
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Deduct the market value of the securities on your tax return, provided that your stock has increased in value. Neither you nor the charity pay taxes on the gains.
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Decide whether you should donate cash or stock if the value of the stock has decreased. When the stock value has dropped, you do not get the benefit of a decline in the value. It might be more beneficial, for tax purposes, to sell the stock and donate the cash to the charity and take the decline in stock value as a loss to offset gains.
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Tips & Warnings
Inherited Individual Retirement Accounts/Agreements (IRAs) do not have step up/step down rules. Further, liquidation of IRAs will likely incur tax burdens at your income tax rate. Review possible ways to avoid these tax liabilities, such as spreading out withdrawals over your lifetime, with your accountant or financial adviser.
