Senior Tax Specialist Practice Exam 2025 – Full Preparation Guide

When inherited stock is sold, the stock basis reported on Form 8949 is determined by its fair market value on the date of the decedent's death. This is due to the step-up in basis rule that applies to inheritances. Under this rule, the heir's basis in the inherited asset is usually adjusted to the fair market value at the time of the decedent's death rather than the original purchase price paid by the deceased.

This provides a beneficial outcome for heirs, as it can minimize the capital gains tax liability when the inherited asset is eventually sold. If the stock appreciates after the original purchase but prior to the inheritance, the heir does not pay taxes on the gains accrued during the decedent's ownership, which can lead to a significant tax advantage.

The other options do not reflect the correct treatment under tax law. For instance, the original purchase price, averages between different dates, or prices prior to death do not apply in the calculation of basis for sold inherited stock. Therefore, the fair market value on the day of death is the accurate measure for establishing the stock's basis when calculating any potential capital gains or losses from the sale.