Gifting stock is a great way to introduce a friend or family member to the benefits of investing. Young children are the ideal recipient because they have the benefit of time to maximize the value of the stock before they cash out.
A question we’re frequently asked when a client receives stock as a gift or as part of an inheritance is, “What are the tax implications?” The good news is that in most cases, gifted or inherited stocks are not subject to capital gains tax.
If you’re the recipient of stock as a gift, you don’t have to worry about it being taxed until you decide to sell it, and the amount you’re taxed will depend on your tax bracket. This applies whether you received stock as a gift or via inheritance as a beneficiary.
You may be subject to capital gains tax on any increase in the stock’s price (from date of purchase) when you decide to sell. Use the donor’s original purchase cost and date to determine your tax rate. Additionally, if you are given a stock that produces dividend income and not just capital gains, then this income may also be taxable when you decide to sell it.
If you receive stocks as an inheritance, you can determine your tax rate (when selling for a gain) by simply setting the Fair Market Value (FMV) on the date the decedent passed away as your new cost basis.
Finally, it is important to note that if you give away stocks that you have owned for less than a year, then you may be subject to capital gains tax on the sale of those stocks. This is because gifting stocks that have not been owned for at least a year is considered to be a short-term capital gain, which will be taxed at the same rate as your regular income.
The bottom line is that in most cases, gifted or inherited stocks are not taxable, or if they are, usually both the giver and recipient can come out ahead even if they do owe capital gains tax. To determine how your gifted or inherited stocks will be taxed in a given situation, it is important to consult with a tax expert who can guide you through the process so you make the most of your investments. Whether you are gifting or inheriting stocks, it is important to be aware of how these transactions could affect your tax liability. With the right guidance and planning, you can ensure that your investments work for you in both the short term and the long term.