Cost basis and capital gains tax
A step-up cost basis is usually going to be the fair market value (FMV) on the date of your loved one’s death.1 If the executor files an estate tax return, they could use an alternate valuation date of up to 6 months from the date of death.2When you sell an inherited asset for more than the stepped-up cost basis, it would be counted as a long-term capital gain for tax purposes. Your long-term capital gains are taxed at the capital gains tax rate, which is significantly lower than ordinary income taxes.
If you sell the asset for less than the FMV, it would be a long-term capital loss. The tax code allows you to deduct capital losses, and you can apply up to $3,000 a year ($1,500 if married filing separately) in capital losses to reduce ordinary income. If you have more than $3,000 worth of losses, you can carry the loss forward to use in future years.3
To make sure you are taking full advantage of your inherited assets, it’s best to work with a qualified tax advisor.
Net unrealized appreciation (NUA): special rules for company stock in workplace savings plans
When you’re deciding what to do with the company stock, you’ll want to pay attention to the NUA, because beneficiaries can take the same advantage as the original investor. NUA is the difference in value between the cost basis of company stock and its current market value when it’s distributed from a plan as part of a lump-sum withdrawal.4
For example, imagine your loved one purchased company stock in their plan for $20 per share. They bought 100 shares for $2,000. Five years later, the shares are now worth $35 each, for a total value of $3,500. This means $2,000 is the cost basis and the NUA is $1,500.
To learn more, read Make the most of company stock in your 401(k). You should also consider consulting a qualified tax advisor to learn which option makes more sense for you.