question about 0% capital gains rate

http://www.costbasis.com/stocks/i...tedit.html

That is correct, but your cost basis is the price of the stock when it was inherited to you, and you have to have held the stock for over 1 year.

If you have no other income, you sell enough stock so that your capital gain is 35k, then you get the 0% rate for the whole amount.

If you do have other income, you can only sell enough to get your income plus the capital gain to 35k. Any more than that and you get taxed at 15%

Quote from B9FYwspP8J85 : That is correct, but your cost basis is the price of the stock when it was inherited to you, and you have to have held the stock for over 1 year. If you have no other income, you sell enough stock so that your capital gain is 35k, then you get the 0% rate for the whole amount. If you do have other income, you can only sell enough to get your income plus the capital gain to 35k. Any more than that and you get taxed at 15%

I'm confused why the cost basis would be the price of the stock when I inherited it. Presumably, since the prior owner of the stock did not sell the stock, he did not pay any capital gains tax on it. Therefore, wouldn't I need to calculate the capital gains using the price at which the stock was originally purchased?

Looking at the IBM stock in my schwab account, for example, the cost basis is roughly $500 on 45 shares, with the long-term gain listed at $8400. (This stock was purchased a long time ago.) Wouldn't I need to pay tax on the full $8400 rather than the gain over the relatively short time in which I've owned the stock myself?

Inherited stock automatically qualifies for long term capital gain treatment, so you don't have to worry about holding it for a year. Stock inherited in most years (except certain situations in 2010) receive an automatic step-up in basis to fair market value at the date of the estate (or the alternate valuation date is so selected by the executor and the estate is subject to estate tax.)

Quote from bitt3n : I'm confused why the cost basis would be the price of the stock when I inherited it. Presumably, since the prior owner of the stock did not sell the stock, he did not pay any capital gains tax on it. Therefore, wouldn't I need to calculate the capital gains using the price at which the stock was originally purchased? Looking at the IBM stock in my schwab account, for example, the cost basis is roughly $500 on 45 shares, with the long-term gain listed at $8400. (This stock was purchased a long time ago.) Wouldn't I need to pay tax on the full $8400 rather than the gain over the relatively short time in which I've owned the stock myself?

The answer to your last question: No. You pay tax based on any gains since inheriting the stock. It doesn't matter how much it gained in value relative to the original purchase price.

Your confusion is understandable, because what you describe is what intuitively makes sense. It's just not what the law is. This is one of the many tax "loopholes" out there, which is to say, it's just what the law says.

When you inherit stock, your cost basis is the market value of the stock at the moment you inherit it. The original purchase price becomes irrelevant. The term of art for this is "Stepped Up Basis" or "Step Up in Basis".


There are a couple of reasons that the Stepped Up Basis principle might not be so bad as tax law. The first is that until recently when everything under the sun wasn't kept in online accounts, it may have been fairly difficult to determine what the original purchase price was. In other words, this way is much, much easier. The second reason is that if estate taxes come into play, there's really no need to worry about capital gains taxes applying, as the government is getting its share regardless of the price paid.