Figuring out your cost basis:
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If you sell the shares for a gain, use the donor's cost basis and purchase date as your cost basis and purchase/acquisition date to characterize your realized capital gain. In other words, if your donor bought the gifted stock over a year ago from the time you sell the stock, it can be considered a long-term gain - maximum of 15% tax rate.
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If you sell the shares for a loss, your cost basis Cost basis is the original amount paid for a security that has been adjusted for wash sales and corporate actions. Cost basis is used to determine capital gains and losses is the lower of: (1) the donor's basis or (2) the Fair Market Value (FMV) as of the transfer date. Your purchase/acquisition date will be the donor's purchase date in case (1) or the transfer date in case (2). We can thank Congress for this rule; they feel people should be prevented from giving away a loss.
Note:If the donor paid a gift tax on shares given to you with a value over $11,000, you should adjust the cost basis determined above. In the simplest case, adjust it upward by the amount equal to the gift tax. Specifically, the gift tax amount attributable to the stock appreciation before the date of the gift.
Tax Point:
Lower tax rates on capital gains means that you can diversify the family portfolio by selling highly appreciated assets with a big capital gains tax bite. Deciding whether to make a gift to a child during the parent's lifetime or whether the asset should transfer to the child at the parent's death may be less troublesome now that the capital gains rate has taken a dip.
FAQs
Inherited stock, unlike gifted securities, is not valued at its original cost basis—a term used by tax accountants to describe the original value of an asset. When an individual inherits a stock, its cost basis is stepped up to the value of the security, at the date of the death.
Is it better to inherit or be gifted? ›
From a financial standpoint, it is usually better for your heirs to inherit real estate than to receive it as a gift from a living benefactor.
Do you have to pay income tax on inherited stocks? ›
Inherited stock doesn't incur capital gains on any growth prior to your inheritance, but any change in value thereafter will likely trigger capital gains taxes when sold.
Who pays capital gains tax on gifted stock? ›
Shares that have a capital gain can easily be transferred along with the gains to the stock recipient. There's a catch. The recipient of the stock would have to pay taxes on the capital gains, but only once they sell the stocks. This will include the difference between the original cost basis and the selling price.
Should I cash out inherited stocks? ›
For example, if your father paid $50 for a share of stock and it was worth $250 on the day he died, your basis would be $250. If you sell the stock immediately, you won't owe any taxes; if you hold on to it, you'll only owe taxes (or be eligible to claim a loss) on the difference between $250 and the sale price.
How much stock can be gifted tax free? ›
The annual gift tax exclusion entitles you to give away up to $17,000 per person per year as of 2023. You can use the lifetime exemption if the value of the stock is more than the annual exclusion. The lifetime exemption is $12.92 million as of 2023.
Should I gift a stock to my kids or just let them inherit it? ›
Inheriting Stock
In general, if you have assets that have low cost basis it is usually better for your heirs to inherit the assets as opposed to gifting it to them.
Is a gift or inheritance taxable? ›
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income. Example: You inherit and deposit cash that earns interest income. Include only the interest earned in your gross income, not the inherited cash.
What is the federal limit on inheritance tax? ›
Currently, assets worth $13.61 million or more per individual are subject to federal estate tax. Some states also levy estate taxes. The federal estate tax exemption amount is scheduled to sunset at the end of 2025.
What is the 6 month rule for inherited stock? ›
If the executor files an estate tax return, they could use an alternate valuation date of up to 6 months from the date of death. When you sell an inherited asset for more than the stepped-up cost basis, it would be counted as a long-term capital gain for tax purposes.
The answer to this is both a yes and no. If you do not sell your inherited asset, you are not required to pay any capital gains tax. However, if you do choose to sell your inherited asset, this will trigger a CGT event.
How much inherited money is tax free? ›
In 2024, the first $13,610,000 of an estate is exempt from taxes, up from $12,920,000 in 2023. Estate taxes are based on the size of the estate. It's a progressive tax, just like our federal income tax. That means that the larger the estate, the higher the tax rate it is subject to.
What is the difference between gifted and inherited stock? ›
Determining your taxable gain on inherited stocks is more straight forward than with gifted stocks. To figure out your cost basis, set the Fair Market Value (FMV) of the stock on the date of your benefactor's death to your new cost basis. Use the average of the high and low prices of the stock on that date as the FMV.
Do heirs have to pay capital gains on stocks? ›
The IRS does not automatically tax any other forms of property that you might inherit. This means that if you inherit property, stocks or any other form of asset, you generally will not owe taxes when you inherit.
Can you avoid capital gains by gifting? ›
Consider the potential impact of capital gains taxes
If you gift cash, generally there are no income tax consequences for the recipient, though there could be gift and estate tax implications to the donor. But if you give appreciated securities, the capital gains taxes can be significant.
Do you pay tax on gifted shares? ›
No. a gift of an asset is only tax free when it is between spouses/civil partners or to a charity.
Do inherited shares attract capital gains tax? ›
Generally, capital gains tax (CGT) does not apply when you inherit an asset. When you sell an asset you have inherited, and the asset is: not a property, the normal rules apply for calculating your CGT. a property, such as a house, it may qualify for the main residence exemption from CGT.
