When you inherit stocks, you typically receive investments that have increased in value over time. But what do you do if you inherit a stock that has decreased in value since you inherited it?

First, let's review the basics of inheriting stocks. Under current law, inherited assets receive a step-up in basis to market value at the date of the original owner's death. Any gains from the sale of inherited stocks are subject to the long-term capital gains tax rate, no matter how long you personally owned the stock. 

Thus, selling stock soon after you inherit it won't typically result in large capital gains taxes. However, what happens if the stock has declined in value?

Your basis in the stock is still its market value on the date of the original owner's death, so you can trigger a capital loss by selling. For example, assume you inherit stock purchased by your mother for $4,000, that has a current market value of $1,000 when she dies. Your basis in the stock is $1,000. If you sell the stock a few weeks later for $900, you will have a $100 loss that you can use to offset capital gains or income from other sources. 

To decide whether you should hold or sell an inherited stock, determine whether is it an appropriate investment for your financial goals. Would you purchase the stock yourself at current prices? If you wouldn't, consider selling it. Don't hold inherited stocks for sentimental reasons. You're not questioning the investment capabilities of the person you received the stock from when you sell.

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