Integrated Analysis
This analysis is based on a Reddit discussion [1] from November 13, 2025, where a user reported that their brokerage firm failed to provide a stepped-up cost basis for inherited stocks, creating concerns about IRS reporting and tax return compliance.
The stepped-up basis provision is a critical tax mechanism that adjusts inherited assets’ cost basis to their fair market value on the date of the previous owner’s death [2]. This adjustment is essential because the cost basis determines capital gains taxes owed when the asset is eventually sold [2]. When someone inherits capital assets such as stocks, the IRS “steps up” the cost basis to the asset’s value when inherited [3], potentially eliminating years of accumulated capital gains from tax liability.
The issue arises from brokerage reporting requirements. Brokerage firms must report securities transactions on Form 1099-B, which includes cost basis information for “covered securities” [4]. However, complications frequently occur with inherited assets, as brokers may not automatically apply stepped-up basis without proper documentation [5]. If the basis shown on Form 1099-B is incorrect, taxpayers must take corrective action through specific IRS procedures [6].
Key Insights
Tax Revenue Impact:
The stepped-up basis provision represents significant tax revenue implications, accounting for billions in forgone revenues annually with most benefits going to highest-income households [7]. In 2025, estimated tax revenue losses due to this provision reach $61 billion, projected to rise to $68 billion by 2027 [2].
Reporting Complexity:
The IRS has established clear but complex procedures for handling basis reporting discrepancies. Taxpayers must use Form 8949 to report sales when discrepancies exist [8]. For transactions where basis wasn’t correctly reported to the IRS, taxpayers should use Box B on Form 8949 [9]. If broker-reported basis is incorrect, taxpayers must enter the reported basis in column (e) and make adjustments in column (g) [10].
Documentation Challenges:
Brokerage firms typically require formal requests with supporting documentation to implement stepped-up basis [5]. Executors may need to provide death certificates and valuation information to brokers [5], and some brokerages require multiple requests or formal procedures to implement basis adjustments. Response times can vary significantly between firms.
Risks & Opportunities
Immediate Tax Consequences:
If a brokerage reports the original cost basis instead of stepped-up basis, taxpayers could face significantly higher capital gains tax [2][3]. For example, if inherited stock was purchased at $10/share and valued at $50/share at death, failure to step up basis could result in tax on $40/share gain instead of $0 [6]. The difference could be substantial depending on inheritance size and subsequent appreciation.
Compliance Risks:
Relying on incorrect broker-reported basis could trigger IRS scrutiny [10]. Taxpayers bear responsibility for ensuring correct basis reporting, even when brokers make errors [8]. Failure to correct discrepancies could result in penalties and interest. The IRS matches Form 1099-B data with individual tax returns [4], and discrepancies can trigger automated compliance checks.
Opportunity for Proactive Management:
Taxpayers can maintain documentation supporting their basis calculations and follow established IRS correction procedures. Understanding the proper use of Form 8949 and the specific boxes for basis adjustments provides a clear pathway to compliance even when brokerages fail to provide correct information.
Key Information Summary
Taxpayer Responsibilities:
- Documentation required includes death certificates, estate valuation documents, and proof of inheritance relationship
- Fair market value must be determined as of the date of death (or alternate valuation date up to 6 months later if estate tax return filed) [6]
- Taxpayers must ensure correct basis reporting regardless of broker errors [8]
IRS Correction Procedures:
- Use Form 8949 for reporting sales with basis discrepancies
- Check Box B when basis wasn’t reported to the IRS
- Enter correct stepped-up basis and make appropriate adjustments in column (g)
- Maintain supporting documentation for basis calculations
Brokerage Firm Engagement:
- Many brokerages require formal requests with supporting documentation
- Some firms have specific forms or procedures for inherited securities
- Response times vary significantly between firms
- Escalation may be necessary for complex cases
Long-term Capital Gains Context:
For 2025, long-term capital gains tax rates range from 0% to 20% depending on income level [2], making proper basis reporting particularly important for high-value inheritances where tax implications could be substantial.
