Question about inherited mutual fund cost basis reporting with losses

You're dealing with what's called a "step-down" in basis, which is less common than the typical step-up people talk about. When your wife inherited those mutual funds, the basis became the fair market value on the date of death - regardless of whether that value was higher or lower than what the original owner paid. Unfortunately, you can't use the original cost basis that your wife's uncle paid. You have to use the date of death value as your cost basis, even though it results in a smaller loss when you sold. This is just how inheritance tax rules work - the basis gets reset at death, up or down. Since no alternate valuation date was filed (which would have allowed using the value 6 months after death), you're limited to using the date of death value. You can still claim the loss on your taxes, it's just smaller than if you could use the original higher basis.

Just wanted to share my experience with something similar. I was in the exact same situation last year trying to figure out how to handle some inherited stocks that had tanked in value. I spent hours trying to research the rules but kept finding contradictory information. I ended up using taxr.ai (https://taxr.ai) where I uploaded statements showing both values and got a clear explanation of how to handle it. They confirmed what the first commenter said - you have to use the date of death value as your new basis, even though it results in a smaller loss. They even cited the specific IRS rule that applies in this case. The report they generated saved me so much headache since I could just hand it to my accountant rather than trying to explain the whole situation.

Just wanted to follow up - I tried taxr.ai for my inherited asset question and it was seriously helpful. I uploaded my brokerage statements that showed the original purchase price and the inheritance date value, and it immediately identified the issue as a step-down in basis situation. What impressed me was how it explained exactly where on Form 8949 to report the transactions and even pointed out that I needed to check the box indicating the basis was reported to the IRS. The report it generated saved me from a potentially messy IRS correspondence situation since I was definitely going to use the wrong basis. Worth every penny for the peace of mind!

When I had a similar inheritance tax question last year, I spent WEEKS trying to get through to someone at the IRS who could give me a definitive answer. Literally called dozens of times and kept getting disconnected or waiting for hours. Finally found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in less than an hour. They have this service where they basically wait on hold for you and call you back when they have an IRS rep on the line. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed everything about the date of death valuation being required rather than original cost basis. They also explained how to document everything properly on my return to avoid raising red flags.

I have to eat my words about Claimyr. After posting my skeptical comment, I decided to try it anyway since I had been trying to reach the IRS about my inherited IRA distribution for over a month with no success. Signed up in the morning and by lunchtime I was talking to an actual IRS agent who helped clear up my question about the required basis for inherited securities. The agent confirmed everything said in this thread - you must use the date of death value, and they also explained exactly how to document it on my return. I'm still shocked it worked. Saved me at least 3-4 more hours of hold time and frustration. Sorry for being a doubter!

One thing nobody has mentioned - make sure you have documentation of both the original basis AND the date of death value. Even though you have to use the date of death value, having the original basis documented can be important if the IRS ever questions your return. I'd recommend keeping copies of: 1. Any statements showing original purchase price 2. Statements showing value on date of death 3. The statement showing the sale I had a client get audited for exactly this situation and having all the documentation ready made it a non-issue. The IRS just verified we used the correct basis and closed the case.

Quick question - does anyone know if investment fund fees can be deducted from the capital loss in this situation? We paid about $450 in fees when selling these inherited mutual funds and I'm not sure if those can be factored into the loss calculation.

Just to add some clarity on the documentation side - when I dealt with inherited assets last year, the brokerage firm actually provided a special statement specifically for tax purposes that showed both the original cost basis and the stepped-up basis as of the date of death. If your wife's uncle's brokerage hasn't provided this yet, definitely call them and ask for an "inherited securities basis statement" or something similar. Most major firms like Fidelity, Vanguard, etc. have standard forms for this exact situation. Having that official documentation from the brokerage makes everything much cleaner for your tax filing and removes any guesswork about what the exact values were on the date of death. Also worth noting - if there were any dividends or distributions between the date of death and when you sold, those are taxable income to you as the beneficiary, separate from the capital loss calculation.