Inherited Stock Cost Basis — The Step-Up Rule and How to Report It on Form 8949

You sold stock you inherited, and now your broker's 1099-B is telling you that you owe tax on nearly the entire sale price. The cost basis box shows zero, or blank, and the "gain" looks enormous. You know the shares were worth a fortune when you got them, so why is the IRS acting like you paid nothing?

The answer is one of the most valuable rules in the tax code, and your broker probably didn't apply it: inherited stock gets a stepped-up cost basis equal to its fair market value on the date the previous owner died. In plain terms, decades of gains that built up during their lifetime are wiped clean for tax purposes. If your broker reported a zero or original basis, you are being set up to overpay — sometimes by tens of thousands of dollars — and the fix is a straightforward adjustment on Form 8949. This guide shows you how.

What the Step-Up in Basis Actually Means

When you inherit property, your cost basis is not what the deceased person originally paid for it. Instead, under Internal Revenue Code Section 1014, your basis "steps up" (or occasionally down) to the fair market value on the date of death.

Here's why that's so powerful. Suppose your grandmother bought $5,000 of a stock in 1985, and it was worth $200,000 the day she passed away. If she had sold it, she'd owe tax on a $195,000 gain. But you inherit it with a basis of $200,000 — the date-of-death value. If you sell it a month later for $205,000, your taxable gain is only $5,000, not $200,000. The lifetime of appreciation vanished.

A few important details:

• The step-up is to fair market value on the date of death. For publicly traded stock, that's typically the average of the high and low trading price that day.
• An estate may elect an alternate valuation date — six months after death — if it lowers the estate tax. If that election was made, your basis is the value on that date instead.
• Inherited stock is automatically treated as long-term, regardless of how long you actually held it, so you always get long-term capital gains rates.

Why Your 1099-B Shows Zero (or the Wrong Number)

Brokers are only required to track and report cost basis for "covered" securities they hold when a reportable event occurs. When shares transfer through an estate, several things go wrong:

• The broker often doesn't know the date-of-death value and reports $0 basis or leaves Box 1e blank.
• Sometimes the broker carries over the decedent's original basis by mistake — far too low.
• The shares may be flagged as noncovered, meaning the broker explicitly did not report basis to the IRS, leaving it entirely up to you.

None of these are your fault, and none of them are binding. You are allowed — and required — to report your correct stepped-up basis on Form 8949, even when it contradicts the 1099-B. This is the same category of problem we cover in our guide to missing cost basis on noncovered securities; inherited shares are just the highest-stakes version of it.

Step 1: Establish the Date-of-Death Value

Your first job is to determine fair market value on the date of death (or the alternate valuation date, if elected). For publicly traded stock:

1. Find the date of death and the specific security and share count.
2. Look up the stock's high and low trading price on that date. Historical price data is available from the broker, financial data sites, or the estate's records.
3. Take the average of the high and low, then multiply by the number of shares.
4. If the date of death fell on a weekend or holiday, use the average of the nearest trading days before and after.

Keep your calculation and source in your records. If the estate filed an estate tax return (Form 706), the valuations on that return are your authoritative basis — use them.

Step 2: Report the Sale on Form 8949 with an Adjustment

Now you reconcile the broker's wrong number with your correct one. On Form 8949:

1. Enter the sale in Part II (long-term) — inherited stock is always long-term. Use Box E if basis was not reported to the IRS, or Box D if it was.
2. Enter the proceeds (column d) from the 1099-B.
3. Enter your correct stepped-up basis (column e).
4. If the broker reported an incorrect basis to the IRS, you can't just overwrite it silently. Enter adjustment code B in column f, and put the difference as a negative adjustment in column g to bring the gain down to the correct amount.
5. If basis simply wasn't reported (noncovered), enter your correct basis directly in column e — no code needed.

For the mechanics of which box and code applies to your exact situation, our Form 8949 adjustment codes reference has the full table, and the Form 8949 from 1099-B walkthrough shows the column layout end to end.

Worked Example

Your father passed away on March 15, 2025, leaving you 500 shares of a stock. On that date the stock traded between $98 and $102, so the average was $100 — a date-of-death value of $50,000. You sell all 500 shares in November for $54,000. Your broker's 1099-B shows:

• Proceeds: $54,000
• Cost basis: $0 (blank)
• Reported gain: $54,000

On Form 8949 you report proceeds of $54,000, corrected basis of $50,000, and a real long-term gain of $4,000. You just removed $50,000 of phantom gain and the tax that came with it.

Common Mistakes to Avoid

• Using the decedent's original purchase price. That throws away the entire step-up. Basis is date-of-death value, full stop.
• Reporting it as short-term because you only held it a few months. Inherited stock is always long-term.
• Ignoring the alternate valuation date. If the estate elected it, your basis is the six-months-later value — using the date-of-death value instead is wrong.
• Forgetting jointly held or community property rules. A surviving spouse in a community property state may get a full step-up on both halves; in common-law states, only the inherited half steps up. When in doubt, check the estate's records.

FAQ

What is the cost basis of inherited stock?

Its fair market value on the date the previous owner died (or the alternate valuation date, if the estate elected it) — not what they originally paid. This is the "stepped-up basis."

Why does my 1099-B show zero cost basis for inherited shares?

Because the broker often doesn't know the date-of-death value and reports the shares as noncovered with $0 or blank basis. You report the correct stepped-up basis on Form 8949 yourself.

Is inherited stock long-term or short-term?

Always long-term, regardless of how long you actually held it before selling. You get long-term capital gains rates automatically.

How do I find the date-of-death value of a stock?

Take the average of the high and low trading price on the date of death, times the number of shares. If an estate tax return (Form 706) was filed, use the valuations reported there.

What if the estate elected the alternate valuation date?

Then your basis is the fair market value six months after the date of death, not the date-of-death value. Use whichever the estate actually elected on Form 706.

Do I owe tax on the whole sale amount if the broker reported zero basis?

No. You correct the basis on Form 8949. The zero on the 1099-B is a reporting gap, not the actual tax result — your real gain is proceeds minus the stepped-up basis.

Bottom Line

Inherited stock comes with one of the most generous rules in the tax code: your basis resets to the date-of-death value, erasing a lifetime of the previous owner's gains. When your 1099-B shows zero basis, it's not telling you the tax truth — it's telling you the broker didn't have the number. Establish the date-of-death fair market value, report the sale as long-term on Form 8949, and adjust the basis to what it should be.

Do that, and a sale that looked like a massive taxable event usually shrinks to a small gain — or even a loss.

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Sold a batch of inherited shares across multiple lots? Convert your 1099-B free — we extract every transaction with proceeds and holding periods intact, so you can slot in your stepped-up basis and build an accurate Form 8949 without retyping the whole statement.