What Is Gifted Stock?
Gifted stock is stock given from one person or entity to another person or entity. Gifted stocks do not include equities that were either received from a spouse or those stocks received through an inheritance from a descendent.
- Gifted stocks are separate from inheritances and those received from a spouse, and typically include stocks given from one person or entity to another person or entity.
- The main benefit of gifted stocks is lower taxes due to income-shifting strategies. That said, tax calculations for gifted stocks can be a complicated affair.
- Gifted stocks can be transferred using a brokerage account or through an estate planning strategy that involves completing a transfer on death agreement.
- The cost basis for taxing gifted stocks depends on its fair value at the time of sale.
- The Internal Revenue Service (IRS) imposes caps on the value of stocks that can be gifted without having to be reported or taxed.
Understanding Gifted Stock
Gifted stocks offer some potential tax advantages. Gifting stocks can be legally executed as an income-shifting strategy to obtain tax benefits. For tax purposes, the cost of the stock is the original donor's cost upon purchasing the securities.
Capital gains taxes will have to be paid based on the original purchase amount if the value of the stocks exceeds the limits for nontaxable gifts. For 2020 and 2021, the Internal Revenue Service (IRS) stipulates that the maximum value of stocks that you can gift to another person without reporting the gift or incurring tax upon it is $15,000. The cost basis to tax a gifted stock depends on its fair value at the time of sale.
Taking care of the details of this stock gift in advance can also help avoid a situation where those stocks would be among assets that could get tied up in probate, at least in most states.
Process of Transferring Gifted Stock
The exact process involved in transferring stocks to another party as a gift will depend on the specific circumstances but is typically fairly simple and straightforward. For an immediate transfer of stocks held in a brokerage account, you may simply need to just 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 the time of 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, 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 pertaining to a gifted stock varies based on the price of the stock and the holding period. As an 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 decide to sell the stock when it declines from $15.
For example, if the stock's price goes down to $10, then you'd have to pay taxes on a capital loss of $5. However, if the stock's price appreciates to $35 during the time of your holding, then you'd 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.