If you are lucky enough to receive inherited stock, not only will you receive the shares, but you will also get a nice tax break from the government. Taxes on inherited stock work differently than taxes on traditional stock sales. Here are the basics of inherited stock and how the taxes work.

Inherited Stock

In many cases, when individuals with larger estates die, they may have some type of stock to pass on to a beneficiary. When this happens, the stock ownership can go directly to the beneficiary according to the estate planning documents that the individual prepared. When the beneficiary takes possession of the stock, they can decide to hang on to it and let it keep growing in value. The beneficiary could also decide to immediately sell the stock once it is received in order to take an immediate profit. 

Stepped Up Basis

If you have ever sold stock and then filed your taxes later, you know that you have to have the basis price of the stock. The basis price is the original price that you paid for the stock. You have to know the basis price so that you can calculate the difference between what was paid for the stock and what it sold for. The difference between the two is the profit. The profit is what you have to pay taxes on. 

If you inherit old stock from someone, the thought of having to go back and find out what the original price of the stock could be intimidating. Finding out this information could be impossible or it could take a great deal of digging on your part. However, according to the IRS rules on this matter, you do not have to go through this process. Instead of finding the original basis price, the IRS allows you to step up the basis price to the price of the stock on the day that the original owner died. This number should be much easier to obtain and it gives you a nice tax break. If the price of the stock increased substantially over the course of the last 20 years, you do not have to worry about the taxes on that increase.

Immediate Sale

If you decide to sell the inherited stock immediately, you may be able to avoid paying any taxes on the sale. If you sell the stock immediately after you inherit it, it may be close to the same price that it was when the owner of the stock died. If there is no gain from that price, you will not have any capital gains taxes to worry about. 

Keeping the Stock

The other option that you have is to keep the stock and sell it later. If you like the long-term prospects of the stock, you might want to continue to let it grow in value. When you finally decide to sell the stock, you will only pay capital gains taxes on the difference between the stepped up basis and the sales price. 

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