Dear Carrie: Am I right to assume that for determining gift tax liability, the value of a gift of stock is the cost basis? — A Reader
Dear 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.
Though 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. Recipients of a gift don’t pay a gift tax, but when they decide 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 $5.43 million — 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 $5.43 million 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 rule. As an example, let’s say you received a gift of stock from your grandfather. He bought it for $10 a share, and it was worth $15 a share on the day you received 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 received the stock and your holding period (which also began on the date you received it) will be 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 transfer 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 will be 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. Because 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, though 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 adviser. And one last point: Try not to let IRS rules and regulations spoil the pleasure you can get from both giving and receiving!
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at firstname.lastname@example.org.