What is the characterization of income received by a beneficiary from a decedent's stock sale gain?

When a beneficiary receives income from the sale of a decedent's stock, this gain is generally considered a long-term capital gain. This is because, for tax purposes, the holding period of the stock is deemed to be long-term regardless of how long the decedent held the stock before death. The Internal Revenue Code provides that when appreciated property is transferred at death, the beneficiary receives a "stepped-up" basis, effectively adjusting the basis of the stock to its fair market value at the date of death.

This long-term capital gain classification applies even if the beneficiary sells the stock soon after inheriting it, since the IRS treats inherited property as if it was held for more than one year by the decedent. This treatment ensures that beneficiaries do not face a tax burden derived from gains accrued during the decedent's lifetime.

The other characterization options fit different contexts or conditions. Ordinary income applies to wages or interest, short-term capital gain refers to assets held for one year or less, and nontaxable income includes items such as municipal bond interest. In the case of inherited stock and the subsequent gain from its sale, the specific context of a long-term capital gain is what makes the choice definitive.