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<<My wife inherited about $2000 worth of stock when her father died in 1978.>>

I am assuming that $2000 was the Fair Market Value (FMV) of the stock at the time she inherited the stock. Usually, one's tax cost on inherited property is FMV at time of death.

<<The stock is now worth over $12000.>>

About 9.3% annual return. OK, but not great.

<<We were thinking of selling it and putting the entire amount back into four new stocks. Does this count as a wash sale since we are simply re-investing the entire amount? Or, would we be subject to a 20% capital gains on the $10000 increase in the investment?>>

Wash sales only occur when you sell stock and buy back "substantially identical" stock or securities within 30 days. Usually "substantially identical" means the same stock (or shorting the same stock, or options on the stock, or something of that nature) Since you say you want to purchase "4 new stocks", I highly doubt that the wash sale rules apply. So it would be a normal sale, and you've held a little longer than 18 months so the 20% rate applies (10% if you're only in the 15% tax bracket)

<<I think that we'd have to pay capital gains, but it never hurts to ask.>>

Right on both counts. I'd also suggest (if you haven't done it already) to check out the Tax FAQ from the Fool home page, which has lots of useful information on a variety of tax issues (wash sales included).

Hope that helps,

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