Special Rule for Gift Shares

By Kaye A. Thomas
Current as of February 13, 2013

This rarely used rule applies if you’ve received a gift of depreciated shares and want to use the average basis method.

There’s a special rule that applies to certain shares received by gift if you elect to use the average basis method. The rule applies only if the shares are depreciated — in other words, the value at the time of the gift is less than the donor’s basis.

Depreciated gift shares present a special case because the normal rule requires you to use the date-of-gift value, not the donor’s basis, to determine any loss on a sale of these shares, but use the donor’s basis to calculate any gain. The tax regulations prevent you from using the average basis method to avoid this special rule for measuring gain or loss when you sell shares received as a gift.

If you hold depreciated gift shares and want to elect the average basis method, or you’ve already elected that method and you’re receiving depreciated shares as a gift, you have to do one of the following.

  • Provide a statement to your broker or mutual fund company to the effect that you will use the date-of-gift value (the lower number) as the basis of the shares for all purposes. You might do this if the date-of-gift value was nearly the same as the regular basis.
  • Alternatively, exclude these gift shares from your averaging calculations. To do this you would likely have to hold the shares in a separate account. This choice would reduce or eliminate the gain you report on a later sale of these shares if they recover in value.