Tax implications of selling inherited stock when "basis not reported to IRS"?

[Zoot Allures]

Question for the tax-savvy here...

In 2015 my girlfriend inherited about $110k in individual stocks (held at Vanguard) from her father-in-law when he died. Last year (2019), she decided one of Vanguard's LifeStrategy funds met her needs better, so she sold her stocks and moved the entire proceeds into the LifeStrategy fund. Looking at her 1099 form for 2019, we see that the proceeds of the sale (Box 1d) is listed at $110k and the "cost or other basis" (Box 1e) is $70k, so there was $40k in gains in the 4 years she held the stocks. But the form states that the "basis is NOT reported to the IRS." This would make the entire $110k taxable, no? She obviously wants to avoid that. Can anyone help me understand why the basis is not reported to the IRS and what she needs to do? Many thanks.

[terran]

No, the whole $110k is not taxable. This just means that you girlfriend needs to self report the cost basis, which she'll do by filling out Form 8949 and Schedule D (or her tax software will do this based on her entries).

I wouldn't count on the cost basis Vanguard is showing being correct unless you're certain she went through the appropriate process to have that entered. The cost basis of inherited stock is the average of the high and low of the stock on the day the previous owner died. I've been able to find a graph for stocks that will provide this information by googling, but if you have trouble with this post here and I can see if I can dig up a good source for this information. Your girlfriend should probably keep a copy of the death certificate for her records, or at least know that she might have to track one down if the IRS wants substantiation of the reported cost basis.

[Zoot Allures]

No, the whole $110k is not taxable. This just means that you girlfriend needs to self report the cost basis, which she'll do by filling out Form 8949 and Schedule D (or her tax software will do this based on her entries).

I wouldn't count on the cost basis Vanguard is showing being correct unless you're certain she went through the appropriate process to have that entered. The cost basis of inherited stock is the average of the high and low of the stock on the day the previous owner died. I've been able to find a graph for stocks that will provide this information by googling, but if you have trouble with this post here and I can see if I can dig up a good source for this information. Your girlfriend should probably keep a copy of the death certificate for her records, or at least know that she might have to track one down if the IRS wants substantiation of the reported cost basis.

Exactly the info I needed--thanks. I found a source for looking up stock value by date. I looked up a few of the dozen stocks that were involved, and it does appear that the 1099 form from Vanguard has accurate cost/basis numbers.

I imagine there may have been a better way to go about this sale, but that's a question for another day...

[MDM]

Exactly the info I needed--thanks. I found a source for looking up stock value by date. I looked up a few of the dozen stocks that were involved, and it does appear that the 1099 form from Vanguard has accurate cost/basis numbers.

See also the Instructions for Form 8949: Generally, if you disposed of property that you acquired by inheritance, report the sale or exchange on a Part II with the appropriate box checked (D, E, or F). Enter "INHERITED" in column (b).

[phildonnia]

But the form states that the "basis is NOT reported to the IRS." This would make the entire $110k taxable, no?

No.  The basis rules are exactly the same, whether or not it was reported to the IRS.  Whether they did or didn't, you still report the basis yourself when you do your taxes. 

The only difference is that when you complete form 8949, you check a box that the basis wasn't reported by the brokerage.  That tells the IRS computers that they shouldn't try to match it to reports from the brokerage.  That's all.

The brokerage may (and probably will) report the basis to you, as well as they can determine.  But you should check this against your own records, especially if you inherited appreciated assets, or if you have other information that the brokerage might not know about.

By the way, before 2012, brokerages were not required to report basis at all on anything.  So this is really just the old-school way of doing it.  It generally comes up now when the assets were purchased before 2012.