As an example, you inherited a share of stock. The deceased had purchased the stock share at $5.
The stock price on the date of death was $20 and you are allowed to use this number as your adjusted cost basis.
If you sold the share at $40, you would have a $20 long-term gain on the sale. You pay taxes on the $20 gain.
The gain is reported on Schedule D of the 1040 tax return.
See also here.
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