Brokerage Firm Compliance Issues with Stepped-Up Cost Basis for Inherited Securities

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].

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].

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].

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.

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.

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.

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.

• 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]

• 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

• 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

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.