- A gift of stock is valued differently for gift and income tax purposes
- Gift tax liability is based on fair market value at the time of the gift.
- Income tax liability (when the recipient sells) is based on both cost basis and holding period.
Am I right to assume that, for determining gift tax liability, the value of a gift of stock is the cost basis?
-- A Reader
I'm glad you asked this question because gifts of stock can raise a lot of tax issues. That's because there are different ways of valuing stock depending on whether it's for gift or income taxes.
While your question is specifically about gift tax valuation, I'm going to expand my answer a bit. The gift tax liability applies only to a donor who gives more than $14,000 to any one person in a given year. The recipient of a gift doesn't pay a gift tax, but when he or she decides to sell the stock, they have to calculate a value for income tax purposes.
Valuing stock for gift tax purposes
The simple answer to your question is no, the value of a gift of stock for gift tax liability is NOT the donor's cost basis, but rather the fair market value of the stock at the time the gift is given. So let's say you purchased 100 shares of XYZ stock at $50 a share. Your cost basis is $5,000. Now the stock is $80 a share and you give it as a gift. The value of your gift for gift tax purposes is $8,000.
In 2015, you can give up to $14,000 to an unlimited number of individuals each year without paying a gift tax or even reporting the gifts. If you give over that amount to any individual, however, you must report the gift on your tax return, but you don't have to pay taxes until you give away more than the current lifetime limit of $5,430,000--for the amount above and beyond $14,000 per person per year. So in the example above, there would be no gift tax liability. However, if the stock happened to be $150 a share, the value of the gift would be $15,000. You'd then have to report it and $1,000 would be applied toward your $5,430,000 lifetime exclusion.
Valuing a gift of stock for income taxes
The recipient doesn't have to worry about gift taxes. It's when the recipient decides to sell the stock that the issue of valuation comes up--for income taxes. And this is where things can get a bit more complicated.
In general, when valuing a gift of stock for capital gains tax liability, it's the donor's cost basis and holding period that rules. As an example, let's say you receive a gift of stock from your grandfather. He bought it for $10 a share and it's worth $15 a share on the day you receive it. If you then sell the stock, whether for a gain or a loss, your cost basis will be the same as your grandfather's: $10 per share. Sell it at $25 and you'll pay tax (at the short- or long-term rate, depending on how long he owned the stock) on a gain of $15 a share; sell it at $8 and your capital loss will be $2 a share.
But now let's say the stock your grandfather bought for $10 a share was only $5 a share on the day you received it. If the stock continues to go down and you decide to sell it, the fair market value on the date you receive the stock and your holding period (which also begins on the date you received it) is used to determine your loss. So if you sell the stock for $3 a share, your capital loss will be $2 a share and your holding period will be measured from the transfer date. However, if the stock price rises above $10, then the original cost basis and original holding period transfers over to you. For example, if the stock in this case rose to $15, you would report a $5 gain and your holding period would be measured from when your grandfather first bought the stock. There is one important exception: if you sell the stock at a price somewhere between your grandfather's $10 basis and the $5 fair market value, no gain or loss is recognized.
Determining fair market value
The concept of "fair market value" comes into play whether you're looking at gift or capital gains tax liability, so it's important to know how this is determined. Since stock prices can go up or down on any given day, the fair market value of a gift of stock is the average between the high and low share prices on the date the gift is given.
As you can see, while the answer to your question is pretty straightforward, there's a lot more to be aware of when it comes to gifts of stock. As always, it's a good idea to talk to your tax advisor. And, one last point--try not to let IRS rules and regulations spoil the pleasure you can get from both giving and receiving!
Looking for answers to your retirement questions? Check out Carrie's new book, "The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions."
This article originally appeared on Schwab.com. You can e-mail Carrie at email@example.com, or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
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