Tax Considerations When Gifting Stock
Gifting stock can be a thoughtful and potentially lucrative gesture, but it’s essential to understand the tax implications involved. This article will explore the tax considerations associated with gifting stock, drawing from reputable sources such as InvestmentNews, Investopedia, and Charles Schwab.
Capital Gains Tax
When an individual receives gifted stock, they may be subject to capital gains tax if they decide to sell the stock. The tax is calculated based on the difference between the sale price and the cost basis of the stock. The cost basis is the original purchase price of the stock for the donor.
Cost Basis
Upon receiving gifted stock, the recipient assumes the cost basis and holding period of the stock. This means that if the recipient sells the stock, they will be liable to pay capital gains taxes based on the original cost basis of the stock, not the value of the stock at the time of the gift.
Gift Tax
The value of the gifted stock may be subject to gift tax. In 2022, the IRS allowed individuals to gift up to $16,000 per person without reporting it or paying gift taxes. However, gift tax is only paid when gifts exceed the lifetime gift tax exemption, which was $12.06 million in 2022. The tax rate for gifts can range from 18% to 40% depending on the size of the taxable gift.
Inherited Stock
Inherited stock offers greater tax advantages than regular gifted securities. The cost basis for inherited stock is the market value at the date of the donor’s death, which can result in a lower tax bill for the recipient.
Conclusion
Gifting stock can be a beneficial strategy for both the donor and the recipient, but it’s crucial to be aware of the potential tax implications. By understanding the rules and regulations surrounding capital gains tax, cost basis, gift tax, and inherited stock, individuals can make informed decisions about gifting stock and minimize their tax liability.
Sources
- Tax Considerations When Gifting Stock – InvestmentNews
- Gifted Stock: Definition, Process, and Tax Implications – Investopedia
- Can You Give Stock as a Gift? | Charles Schwab
FAQs
Do I have to pay taxes on gifted stock?
Yes, you may be subject to capital gains tax if you sell the gifted stock. The tax is calculated based on the difference between the sale price and the cost basis of the stock.
What is the cost basis of gifted stock?
When you receive gifted stock, you assume the cost basis and holding period of the stock from the donor. This means that if you sell the stock, you will be liable to pay capital gains taxes based on the original cost basis of the stock, not the value of the stock at the time of the gift.
Is there a gift tax on gifted stock?
Yes, the value of the gifted stock may be subject to gift tax. However, there is an annual gift tax exclusion of $16,000 per person in 2022. This means that you can gift up to $16,000 worth of stock to someone without having to pay gift tax.
How is inherited stock taxed differently from gifted stock?
Inherited stock has a more favorable tax treatment than gifted stock. The cost basis of inherited stock is the market value at the date of the donor’s death, which can result in a lower tax bill for the recipient.
How long do I have to hold gifted stock to avoid paying short-term capital gains tax?
If you hold gifted stock for more than one year before selling it, you will be eligible for the long-term capital gains tax rate, which is generally lower than the short-term capital gains tax rate.
Can I avoid paying capital gains tax on gifted stock?
There are a few ways to avoid paying capital gains tax on gifted stock. One way is to hold the stock until you die, at which point it will receive a step-up in basis to the market value at the date of your death. Another way to avoid capital gains tax is to donate the stock to a charity.
What is the lifetime gift tax exemption?
The lifetime gift tax exemption is the total amount of money that you can give away during your lifetime without having to pay gift tax. The lifetime gift tax exemption is currently $12.06 million.
What is the gift tax rate?
The gift tax rate ranges from 18% to 40%, depending on the size of the taxable gift.