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Tax Implications When You Transfer Stock Ownership as a Gift

Stocks can be a great gift, and if you’re wondering how to transfer stock to a family member, you can simply contact your broker. You could also fill out a stock transfer form and endorse the stock certificate. Learning how to gift stocks is the easy part – you also have to consider the tax implications. 

You don’t have to pay tax immediately when you give away stocks, but if you give away a sizeable amount, it can affect your estate tax exemption. Gifted stocks can also lead to tax bills for the recipient. This guide provides an overview to the tax implications of gifted stock.

Who Pays Capital Gains Tax on Gifted Stock?

You don’t have to pay capital gains tax when you give away stocks. The person who receives the stocks, however, will face capital gains tax if they earn money when they sell the stock. Capital gains refer to the difference between the value of the stock when it was purchased and when it was sold, but with gifted stocks, the exact calculations can vary depending on the situation. 

When the Recipient Sells the Stock at a Gain

Here’s what happens when the recipient sells the stock at a gain. They must use the price you paid when calculating their capital gain. Say you bought the stock for $1,000, it was worth $2,000 when you gave it to them, and it was worth $4,000 when they sold it. They have a gain of $3,000. That’s the difference in its value from the day you purchased it to the day they sold it.

When the Recipient Sells the Stock at a Loss

You can generally use a capital loss to offset capital gains on your tax return. This is an advantage of a loss, but unfortunately, the loss is limited when it comes from gifted stock. Imagine that you purchase a stock for $4,000, you give it to a relative when it’s worth $2,000, and the relative sells it for $1,000. 

They can’t use your purchase price when calculating the loss. They must instead use the fair market value of the stock on the day they received it. This means their loss is $1,000, whereas it would be $3,000 if they could use your basis. 

When There Is a Gain and a Loss

Here’s what happens when there’s both a gain and a loss depending on the basis you use. Imagine you purchased a stock for $4,000, and when you gave it to a family member, it was worth $2,000. The recipient sells the stock a few years later for $3,000. 

There’s a loss if the recipient uses your purchase price as the basis but a gain if they use the fair market value of the stock on the day they received the gift. The recipient, in this situation, shouldn’t claim a gain or a loss.

Gifting stock can be advantageous in situations where the recipient’s capital gains tax rate is lower than the giver’s rate. You should make sure, however, that the recipient understands that they may incur a tax bill when they sell the stock.

Other Considerations When Gifting Stock to Family

A few additional tax considerations can come into play when you give stock to family members. There are no immediate taxes due when you gift a stock, but you should be aware of the following:

Gift and Estate Tax

You can give any amount of money or property of any value to anyone. There are no limits on the amount you can give away, but there can be long-term tax implications on sizeable gifts. You need to file a gift tax return if you give gifts over a certain threshold. The gift threshold is $16,000 as of 2022.

This means that if you give anyone a gift of stock (or anything else) worth more than $16,000, you must file a gift tax return. No tax is due with this return, and the amount you report gets subtracted from your capital gains exemption at the time of your death.

Kiddie Tax

Many people want to explore the idea of gifting stock to a child to avoid taxes, but they need to be aware of the kiddie tax. This tax may apply in situations where you give stocks to a child who is 18 or under or to full-time students up to age 24 who pay for less than half of their own support. 

This tax is designed to prevent parents from transferring stocks to their children to reduce their tax liability. Children with over $2,200 in unearned income will incur their parents’ tax rate on unearned income over that threshold. 

Step-Up Basis on Inherited Gifted Stock

One potential way to save money when you gift stock is to gift it to someone who will leave it to you when they die. This can help to reduce capital gains because when you inherit a stock, you receive a step-up basis. Here’s an example of how that works: 

Say you buy a stock for $5,000 and give it to your parents when it’s worth $10,000. They leave the stock to you when they pass, and now it’s worth $15,000. You sell the stock for $17,000. Your capital gains would have been $12,000 if you had to use your purchase price as the basis, but since you get to use its value on the day you inherited it, your capital gains are only $2,000. This can significantly help to reduce your tax bill.

It is helpful to contact a wealth management specialist before giving away stocks to avoid confusion and errors. They can help you understand the current and long-term tax implications for you and the recipient and guide you in exploring advanced strategies to minimize the tax as much as possible. 

Reach Out to the Experts to Get Help Today

The experts at Bogart Wealth would love to answer your questions about gifting stock or other wealth management strategies. We encourage our clients to ask tough questions and guide them toward solutions customized to their situation. We offer financial planning, investment management, tax optimization, and more. Contact Bogart Wealth today to learn more.

IMPORTANT DISCLOSURE INFORMATION:

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.comPlease Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Bogart Wealth client, please contact Bogart Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

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