topic Cost Basis on Inherited CD in Retirement tax questions

Cost Basis on Inherited CD

sbchapp — Wed, 12 Mar 2025 17:26:57 GMT

Why would I receive a 1099-B on an inherited CD (TOD) that was allowed to mature (i.e., not cashed out prior to maturity)? Everything I read states that the face value of the CD is non-taxable to the recipient. This was a 15-month CD with semi-annual interest payments, which the decedent received before her death. I received the final 3-month interest payment and also received a 1099-Int. on this income. I just don't understand the additional capital gain due to the cost basis assigned to the CD on the date of death. Is there any special calculation method of cost basis for a CD that has semi-annual interest payments? Furthermore, why would I be responsible for a capital gain on a CD that was held until maturity? It was originally purchased at par, NOT on the secondary market.

Re: Cost Basis on Inherited CD

JamesG1 — Thu, 13 Mar 2025 13:53:44 GMT

IRS form 1099-B which records the maturity of a certificate of deposit generally reports the principal amount of the investment as both the Proceeds and Cost or other basis reporting $0 gain.

As you described, the interest income is reported separately.

In your case, what cost basis has been assigned and what explanation have your been given?

You may need to report The cost basis is incorrect or missing on my 1099-B.

@sbchapp

[Edited 03/13/25 | 6:53 pm PST]

Re: Cost Basis on Inherited CD

sbchapp — Thu, 13 Mar 2025 20:20:49 GMT

The proceeds were reported as the face value of the CD and the cost basis was reported as the FMV, I assume, on the date of death. As mentioned earlier, the CD was held to maturity, and I contend there should be no gain. I was not able to obtain the calculation of the cost basis on the 1099-B from the brokerage firm which held the CD after it transferred to me. The brokerage firm just said the reported gain was due to the difference between the CD face value and the cost basis on the date of death.

Re: Cost Basis on Inherited CD

RachelW33 — Mon, 17 Mar 2025 02:59:35 GMT

You are correct, when you purchase a CD through your brokerage and hold it to maturity, there will be no gain.

However, in your case, your cost basis is not the face value of the CD, it is the FMV of the CD on the date of death. The market value of CD's held by a broker (unlike traditional bank CD's) fluctuate primarily due to changes in market interest rates. So the value of the CD was more when you inherited it than when it matured, this is why there is a gain reported.

For example if the CD that you inherited had a 5% interest rate but the market interest rate was 4.5% on the date of death, the CD would be worth more than face value at that time to account for it's higher rate.

As the CD gets closer to maturity, it's value will always gradually move to it's face value and be worth exactly it's face value when it matures.

Re: Cost Basis on Inherited CD

sbchapp — Tue, 18 Mar 2025 14:25:29 GMT

The cost basis reported on the 1099-B was less than the face value of the CD and therefore a gain was reported, so I am not sure I follow your example. According to your reply, does this mean the market (interest) rate was less than the rate when the CD was first purchased? I received the face value of the CD at maturity plus the remaining 3 months of interest due at the original rate (not the market rate on the date of death). My tax documents included a 1099-B for the difference in the cost basis and the face value of the CD and the interest I received. By the way, the gain was more than the interest.

According to your statement, as the CD gets closer to maturity, and the value moves closer to face value, shouldn't the gain get closer and closer to zero, therefore the gain would no longer be applicable?

Re: Cost Basis on Inherited CD

RachelW33 — Tue, 18 Mar 2025 16:30:22 GMT

I'll address each of your questions separately:

1. The cost basis reported on the 1099-B was less than the face value of the CD and therefore a gain was reported, so I am not sure I follow your example.

Yes, your situation would actually be the opposite of my example. In your case, your cost basis is lower than the face value of the CD because the market rate of interest was higher on the date of death than the fixed rate of the CD.

2. According to your reply, does this mean the market (interest) rate was less than the rate when the CD was first purchased?

No, if the cost basis reported to you was less than the face value of the CD, that indicates that the market interest rate on the date of death was more than the CD's fixed rate.

3. According to your statement, as the CD gets closer to maturity, and the value moves closer to face value, shouldn't the gain get closer and closer to zero, therefore the gain would no longer be applicable?

Yes, that is correct. But things are different in your situation because your basis is different than the face value of the CD. Your cost basis represents what would have been received if the CD was sold on the date of death.

Re: Cost Basis on Inherited CD

sbchapp — Tue, 18 Mar 2025 22:50:45 GMT

If the value of the CD was less on the date of death due to the increase in interest rates, why would I be responsible for a capital gain tax on this CD that I did not sell but allowed to mature at the "lower" (original) interest rate (in addition to paying ordinary income taxes on the interest)?

Re: Cost Basis on Inherited CD

RachelW33 — Tue, 18 Mar 2025 23:49:09 GMT

You are responsible for capital gain tax on this CD because the CD's value at maturity was more than your cost basis (value on the date of death). When a brokered CD matures, it is deemed to be redeemed or sold which is why you received a Form 1099-B reporting it.