A gifted stock is a stock that is given to someone as a gift. Because stocks can grow or decline in value, it's important to know how they are viewed by the Internal Revenue Service and what you need to do if you're given stock as a gift.
- Gifted stock is stock given from one person or entity to another person or entity.
- Gifting stocks can provide tax advantages, though it’s worth speaking with an advisor first.
- Gifted stocks may be transferred using a brokerage account or through an estate planning strategy that involves completing a transfer on death (TOD) agreement.
- The cost basis for taxing gifted stocks depends on their fair market value at the time of sale.
- The Internal Revenue Service (IRS) imposes caps on the value of stocks that can be gifted without being reported or taxed.
What Is Gifted Stock?
Gifted stock is the transferring of stock from one person or entity to another person or entity. Gifting company shares with the potential to grow significantly in value can make a nice present, though it’s worth bearing in mind that this generous act may be subject to gift tax and result in a hefty tax bill for the recipient when it’s time to sell.
Understanding Gifted Stock
Investors keen to share their wealth might wonder whether it makes more sense to gift stock or sell it and give away the proceeds. The answer generally depends on the value of the stock being given and the tax status and bracket of both the recipient and the donor.
In 2022, the Internal Revenue Service (IRS) allows you to give up to $16,000 per person without reporting it and paying gift taxes. It’s worth remembering, though, that this tax—which can range from 18% to 40% on a sliding scale, depending on how big the taxable gift is—only needs to be paid when gifts exceed the lifetime gift tax exemption ($12.07 million in 2022). There is no limit on gifts between spouses.
Gifts can include physical assets, stocks, bonds, cash, or anything else of value. The lifetime gift tax exclusion is the value of gifts you can give in total over your lifetime.
Capital gains tax liabilities must also be considered. If you were to sell the stock and gift the proceeds, you would need to report any capital gains and pay the tax after accounting for its cost basis. In this case, it may be worth gifting the stock, particularly if the recipient has a lower tax rate.
When gifting stock, the recipient assumes your cost basis and holding period. In other words, if you were to give a friend $12,000 worth of stock purchased five years earlier for $7,000, then they would be liable to pay long-term capital gains taxes on a profit of $5,000 should they sell straightaway. Losses are treated slightly differently: If the stock depreciates after it was gifted and the recipient decides to sell it, then the fair market value (FMV) on the date of the transfer is used to determine the loss.
The same rules apply if this gift is going to a child. In theory, your child would pay less in capital gains taxes when disposing of the gifted stock, assuming they earn little to no income. However, it’s worth bearing in mind that the kiddie tax means that anything over $2,200 could be taxed at the guardian’s tax rate.
Inherited stock offers greater tax advantages than regular gifted securities. All inherited stock is treated as long-term property, and the recipient’s cost basis is the market value at the date of death—rather than the price of the original purchase.
Process of Transferring Gifted Stock
The process involved in transferring stocks to another party as a gift will depend on the specific circumstances, but it is typically straightforward. For an immediate transfer of stocks held in a brokerage account, you may only need to fill out a form that changes the name on the ownership title for those stocks.
If the gift is an estate planning strategy, and you want to arrange a transfer that will take effect upon your death, you would complete a transfer on death (TOD) agreement. The person named as the designated beneficiary in the TOD agreement has no claims or rights to that stock as long as you are alive. Until your death, you continue to be the legal owner of that stock and can sell it, close the account, or change the paperwork to name someone else as the beneficiary.
Depending on the policies of your brokerage firm, you may also be able to name an alternate beneficiary. If you own the stocks with another person, such as your spouse, then the TOD agreement generally would only apply once both owners of the joint account have died.
This TOD process is similar to a payable on death (POD) process used with bank accounts. Setting up this arrangement in advance will make it much easier for the intended recipient to take ownership of the stocks quickly upon your death.
Example of Gifted Stock
The accounting for tax liabilities of a gifted stock varies based on the stock's price and the holding period. For example, consider the following scenario: Suppose your father purchases a stock for $25 and decides to gift it to you when its price is $15. The cost basis for your tax liabilities is $15 per share if you choose to sell the stock when it declines from $15.
So, if you sell the stock for $10, you'll have a capital loss that you can deduct from your other capital gains and income. However, if the stock’s price appreciates to $35 during the time of your holding, then you would have to pay taxes on a capital gain of $10, with your father’s original cost price becoming the cost basis for your tax liability.
What Is the Difference Between Gifted Stock and Inherited Stock?
Inherited stock, unlike gifted securities, does not take the original purchase value into account for tax purposes. When you inherit stock, its cost basis is the stock's market value at the date of the donor’s death, which usually results in a lower tax bill.
How Long Should Gifted Stock Be Held to Avoid Short-Term Capital Gains Tax?
When you are gifted stock, the holding period includes the time the donor owned the stock. In other words, should you wish to sell immediately, you won’t be liable to pay higher short-term capital gains tax, provided that the person who gifted the stock bought it at least one year beforehand.
How Is Gifted Stock Taxed When Sold?
Tax liability depends on both the holding period and the cost basis. If the gifted stock increases in value, your eventual gain when selling will be taxed based on the original purchase price of the shares. However, if the shares depreciate after the gift was made and you decide to sell them, then the value of the stock on the date when it was gifted to you will determine the weight of your capital loss.