I understand that Estates can be passed tax free to the heirs if their value is less than $2,000,000, and that if you inherit stocks and sell them you'd have to pay Capital Gains on the difference between the stepped-up value and the actual sale value, but do you also have to report the sale proceeds as income and pay Federal Income tax on that as well? Any help would be appreciated!

When you complete the capital gains computation on Schedule , the result is ransferred to Form 1040 and reported as income.

Your tax is computed on the Schedule D.