I see questions about inherited assets come up here pretty often, and there's one issue that doesn't get enough attention.
The issue: When you inherit stocks, your cost basis "steps up" to the fair market value on the date of death. This is a big deal – you don't owe taxes on gains that happened during the deceased's lifetime.
The problem: Most brokerages get the value wrong. Some use the closing price. Some keep the original purchase price. Some just leave it blank.
What the IRS actually requires: For stocks and ETFs, fair market value is the average of the high and low price on the date of death – not the closing price. This is straight from IRS Publication 551.
Example:
Say you inherited 150 shares of a stock from someone who passed in October 2023.
– High price that day: $142.80
– Low price that day: $139.40
– Correct FMV: ($142.80 + $139.40) / 2 = $141.10
– Stepped-up basis: 150 × $141.10 = $21,165
If the broker still shows the original cost of $18,200 from 2009, that's ~$3,000 in phantom gains. At 15% LTCG, that's $450 in unnecessary taxes. On one position. Multiply that across a portfolio with 5-10 inherited positions and it adds up fast.
What to check:
1. Pull up your brokerage statement and look at cost basis for inherited positions
2. Look up historical high/low prices for the date of death (Yahoo Finance has this data)
3. Calculate: (high + low) / 2 × shares
4. Compare to what your broker shows
If it's wrong:
– Contact your broker with documentation (death certificate, your calculation, historical prices)
– Some will update it, some won't
– Either way, you report the correct basis on your taxes – you're not bound by the 1099-B
– Keep documentation in case of audit (IRS Form 8949 has a column for basis adjustments)
Edge cases:
– If death was on a weekend/holiday, you average the trading days before and after
– Mutual funds use NAV (single price), not high-low average
– If the estate elected "alternate valuation date" (6 months later), use that date instead – but this is rare and only applies if an estate tax return was filed
Why brokers get this wrong:
Brokers aren't responsible for knowing someone died. When shares transfer, they often just carry over the old basis or use whatever the estate executor provided (who often doesn't know the rules either).
Worth 20 minutes to check if you've inherited anything in the last few years
Heads up if you inherited stocks – your broker's cost basis is probably wrong
byu/Ok-Responsibility734 inpersonalfinance
Posted by Ok-Responsibility734
4 Comments
This is super helpful, just went through this exact situation last year. My broker (Schwab) had the cost basis completely wrong on everything I inherited from my dad – they literally just copied over his original purchase prices from like 2015
Took about 3 phone calls and sending them the death certificate plus my own calculations but they eventually fixed most of it. Still had to manually adjust one position on my taxes because they insisted their number was right
The weekend/holiday thing caught me off guard too since he passed on a Saturday. Had to average Friday and Monday prices which actually worked out better for me
Definitely worth the hassle, saved me probably $800 in taxes across the whole portfolio
This is solid info. Inherited some positions last year and just assumed my broker had it right. Checked after reading this and yep, they used closing price instead of high-low average. About $200 difference on one stock
Similarly, Goldman Sachs misreports cost basis of ESPPs
If you use Shareworks for work and buy ESPPs, note that you have to manually calculate every purchase. And then you’re also at a high chance of audit since they report the wrong figures so keep your calculations for 4 years
I’m confused. We’re talking about a step up in basis. Where is the capital gains tax due? The $3000 is the step up.
The bigger annoyance is having an inherited portfolio with assets that appreciated just 9% in 14 years.