Final answer:
Harry's basis in the inherited stock is the fair market value on the date of his aunt's death, which amounts to $5000 for the 100 shares valued at $50 each.
Step-by-step explanation:
When determining the basis of inherited stock, it is indeed common to use the fair market value of the stock on the date of the decedent's death, rather than the original purchase price. In the case of Harry inheriting 100 shares of stock valued at $50 per share on the date of his aunt's passing, his basis in the stock is calculated by multiplying the number of shares by the value per share at the time of inheritance.
In this scenario, Harry's basis in the inherited stock would be 100 shares multiplied by $50 per share, resulting in a total basis of $5000. This fair market value at the time of inheritance establishes a new starting point for Harry's investment in the stock. It is important to note that this basis is crucial for determining capital gains or losses when Harry decides to sell the inherited stock.
The use of fair market value at the date of inheritance is a significant tax consideration. When Harry eventually sells the stock, the capital gain or loss will be calculated based on the selling price compared to his stepped-up basis of $5000, rather than the original purchase price by his aunt. This approach helps ensure a more accurate representation of the actual economic gain or loss associated with the inherited asset and provides a fairer assessment for tax purposes.