Considerations
The recipient of a gift does not pay tax on any gift valued at $11,000 or less, no matter if it is a boat, car, cash, or stock. This means you don't owe taxes at the time of the gift of the stock. When the recipient sells the stock, however, it is a taxable event. Like everything else related to investing and taxes, a correct cost basis is the key to resolving how much you owe when you sell a stock received as a gift or through inheritance. A local library's microfilm archive might be the best resource to find the value of shares on a particular date and determine your cost basis, but be cautious about stock splits and other corporate actions! Tax advisors suggest that you consult the S&P stock guide, the Value Line Investment Survey, or the company that issued the shares for a history of the stock price, stock splits and other capital changes. But if you have been a member of GainsKeeper and recorded this stock in GainsTracker, this has been done automatically for you.
What is your Taxable Gain on Stocks Received as a Gift?
Figuring out your cost basis:
If you sell the shares for a gain, use the donor's cost basis and purchase date as your cost basis and purchase/acquisition date to characterize your realized capital gain. In other words, if your donor bought the gifted stock over a year ago from the time you sell the stock, it can be considered a long-term gain - maximum of 15% tax rate.
If you sell the shares for a loss, your cost basis Cost basis is the original amount paid for a security that has been adjusted for wash sales and corporate actions. Cost basis is used to determine capital gains and losses is the lower of: (1) the donor's basis or (2) the Fair Market Value (FMV) as of the transfer date. Your purchase/acquisition date will be the donor's purchase date in case (1) or the transfer date in case (2). We can thank Congress for this rule; they feel people should be prevented from giving away a loss.
Note:If the donor paid a gift tax on shares given to you with a value over $11,000, you should adjust the cost basis determined above. In the simplest case, adjust it upward by the amount equal to the gift tax. Specifically, the gift tax amount attributable to the stock appreciation before the date of the gift.
Tax Point:
Lower tax rates on capital gains means that you can diversify the family portfolio by selling highly appreciated assets with a big capital gains tax bite. Deciding whether to make a gift to a child during the parent's lifetime or whether the asset should transfer to the child at the parent's death may be less troublesome now that the capital gains rate has taken a dip.
What is your Taxable Gain on Stocks Received through Inheritance
Determining your taxable gain on inherited stocks is more straight forward than with gifted stocks. To figure out your cost basis, set the Fair Market Value (FMV) of the stock on the date of your benefactor's death to your new cost basis. Use the average of the high and low prices of the stock on that date as the FMV. Your holding period is always considered long-term and qualifies for the 15% maximum tax rate. Remember, when filing your Schedule D, enter "inherited" in the space marked for the acquisition date for this stock. That way, the IRS won't confuse your holding period with the date you received the stock.