Are Inherited Stocks Long-Term or Short-Term Capital Gains?

No matter how long you hold the inherited stocks before selling, your proceeds are always considered long-term capital gains. That's because there's a special provision in the tax code: even if you sell inherited shares within one year after the decedent's death, you're considered to have owned them for more than one year, which makes them count as long-term capital gains.

Depending on how long you hold the stock after you inherit it and the volatility of the market, you might not have much gain to report. That's because your basis for the stock gets set to the fair market value of the stock on the date of the decedent's death. For example, if the decedent bought the stock for $2,000 decades ago and held it until death when it was worth $10,000, your basis jumps up to $10,000. Occasionally, this backfires because it also can drop the basis if the fair market value has gone down.

When you sell the stock, calculate your capital gain by subtracting your net proceeds from your basis. Your net proceeds don't include the costs of selling the stock, so you get to subtract out your transaction or broker fees. For example, if you pay a $15 transaction fee to sell your stock for $11,000, your net proceeds are only $10,985. If your stepped-up basis is $10,000, that means your gain is only $985.

The special rule that allows you to sell inherited stock at any time and still count it as long-term capital gains is beneficial because of the lower tax rates. As of 2013, if you fall in the 15 percent ordinary income tax bracket or lower, you won't pay any income taxes on your long-term capital gains. If you're in the 25 percent and 35 percent ordinary income tax brackets, you'll pay 15 percent on your long-term capital gains. You still save even if you're in the top 39.6 percent tax bracket -- your long-term capital gains are only taxed at 20 percent.