How to Cash Out Inherited Stock and Pay Taxes

Inheriting stock can raise questions about gaining control of assets and understanding the financial implications of selling them. Inherited stock might exist as physical certificates or shares held within a brokerage account. Cashing out these assets involves a series of administrative and financial steps.

Establishing Legal Ownership and Access

Before any inherited stock can be sold, establishing legal ownership and access is the first step. This requires documentation to confirm your right as beneficiary. You will need a certified copy of the death certificate, the original will (if one exists), and official court documents such as “Letters Testamentary” or “Letters of Administration” issued by the probate court.

Access varies based on how the stock was held. If held in a brokerage account, contact the brokerage firm directly. They will guide you through their process of submitting legal documents and forms to transfer assets into your name. For physical certificates, work with the stock transfer agent, a company appointed by the issuing corporation. The transfer agent will provide necessary forms, such as a “Transfer of Stock Ownership Form,” which may require a Medallion Signature Guarantee.

The probate process transfers ownership of assets from the deceased’s estate to heirs. If the stock was not held in a “transfer-on-death” (TOD) account or a trust, it becomes part of the deceased person’s estate and must go through probate. This procedure validates the will, if one exists, and appoints an executor or administrator to manage the estate’s assets, including the stock. The executor or administrator gathers information, such as the company name and ticker symbol, to facilitate the transfer.

Determining the Cost Basis for Inherited Stock

The “step-up in basis” rule is an important financial concept for inherited assets. It adjusts the cost basis of inherited stock to its fair market value (FMV) on the date of the decedent’s death. This differs from the original purchase price, impacting potential capital gains tax. It resets the value of appreciated assets, allowing beneficiaries to receive them with a higher cost basis and reducing taxable gain if sold shortly after inheritance.

Establishing the correct cost basis is important as it directly affects capital gains or losses when you sell the stock. If the stock appreciated significantly since the deceased purchased it, the step-up in basis can reduce or eliminate capital gains tax. This adjustment is provided for in Section 1014 of the Internal Revenue Code.

To determine fair market value on the date of death, look up the stock’s closing price. For publicly traded securities, the fair market value is calculated as the average of the highest and lowest selling prices on the date of death. If the date of death falls on a weekend or holiday, the fair market value is determined by averaging values from the trading day before and after. Financial publications, online data providers, or the brokerage firm can assist in obtaining historical valuation data. Maintain records of how fair market value was determined, as this supports the adjusted cost basis for tax purposes.

Selling the Inherited Stock

Once legal ownership and cost basis are established, the next step is selling the shares. The method of selling depends on how the stock is currently held. If the stock has been transferred into a brokerage account in your name, selling is straightforward. You can place a sell order through the brokerage firm online, via their mobile application, or by contacting a representative.

When placing a sell order through a brokerage, you will have options such as a market order, which executes immediately at the current market price, or a limit order, allowing you to specify a minimum price. Before executing the sale, it is important to confirm the brokerage account reflects the accurate, stepped-up cost basis. Receiving the proceeds from the sale involves direct deposit into a linked bank account or the issuance of a check from the brokerage firm.

For physical stock certificates, selling is more involved. You have two options: deposit the physical certificates into a brokerage account first, or work directly with the stock’s transfer agent. If depositing into a brokerage account, the firm provides instructions for endorsing and mailing certificates, which may require a Medallion Signature Guarantee. Once processed and in your brokerage account, you can sell them. Alternatively, the transfer agent can facilitate the sale, which involves completing forms and providing original certificates and may have different procedures and fees.

Reporting the Sale for Tax Purposes

Reporting the sale of inherited stock involves forms and considerations to reflect capital gains or losses. The main tax form you will encounter is Form 1099-B, “Proceeds From Broker, Barter Exchange, and Cryptocurrency Transactions,” issued by the brokerage firm or transfer agent. This form reports the gross proceeds from the sale, but verify the cost basis reported, as it may not always reflect the stepped-up basis and might require adjustment on your tax return.

The sale of inherited stock is reported on Schedule D, “Capital Gains and Losses,” part of your federal income tax return (Form 1040). Before reporting on Schedule D, transactions are listed on Form 8949, “Sales and Other Dispositions of Capital Assets.” On Form 8949, you will detail the property description, acquisition date (listed as “inherited” or date of death), sale date, sales price, and adjusted cost basis. The gain or loss calculated on Form 8949 then carries over to Schedule D.

A beneficial aspect of inherited stock is that its sale qualifies for long-term capital gains treatment, regardless of how long you held the stock. Inherited property receives a statutory long-term holding period. Long-term capital gains are taxed at lower rates (0%, 15%, or 20%) compared to short-term capital gains, which are taxed at ordinary income tax rates. Accurately reporting the sale with the correct stepped-up basis and long-term designation is important to ensure proper tax calculation and avoid issues with the IRS.