By Kaye A. Thomas
Current as of January 4, 2015
How to determine your basis for stock received as a gift.
This page explains how to determine your basis in stock received as a gift. These rules do not apply in the following situations, however:
- If you received stock by inheritance, see Stock Received from a Decedent.
- If you received stock as a gift from your spouse, seeStock Received from Your Spouse.
The amount of a gift you receive is not considered income. The gift may seem as good as a paycheck (or better!) but you are not required to pay income tax on the gift. You are not required to pay gift tax, either. If there is a gift tax, it must be paid by the donor (the person who gave the gift).
Information you need
To determine your initial basis in stock you receive as a gift from someone other than your spouse, you need to know the following:
- What was the donor’s adjusted basis of the stock immediately before the gift? Find this out from the donor (the person who gave you the stock).
- What was the fair market value of the stock on the date of the gift? Check stock listings or other sources for this information.
- You may also need to know one more thing: How much federal gift tax, if any, did the donor pay in connection with this gift? Find this out from the donor. However, this amount is generally zero if the total gifts to one person in one year are less than the annual exclusion amount ($14,000 as of 2015), and may be zero even in the case of much larger gifts.
Once you have this information, you can determine your basis in the stock according to the following rules.
Stock had a loss at time of gift
The rule described here applies if the stock would have produced a loss for the donor at the time of the gift. In other words, the person who gave you the stock had a basis that was higher than the fair market value. See below if the opposite is true.
Example: Your uncle bought 100 shares of XYZ when it was at $72. His basis for the 100 shares, including a $50 commission, was $7,250. He gave the stock to you when it was at $60 and had a fair market value of $6,000. If he sold it instead, he would have had a loss of $1,250.
In this case you have a dual basis in the stock. You have one basis for purposes of determining a gain, and a different basis for determining a loss. This may seem confusing, but the rule is not hard to apply:
- If you sell the stock for more than the donor’s basis ($7,250 in the example) you will use that basis to determine the amount of gain. For example, if you sell for $7,600, you report a gain of $350 ($7,600 minus $7,250).
- If you sell the stock for less than the fair market value at the time of the gift ($6,000 in the example), you use that basis to determine the amount of loss. For example, if you sell for $5,250, you report a loss of $750 ($6,000 minus $5,250).
- Another possibility is that you sell the stock for a price somewhere between the fair market value and the donor’s basis. For instance, you might sell for $6,375 in the example. In this case your gain or loss is zero.
The idea behind this rule is to prevent your uncle from transferring a tax loss to you when he makes a gift of the stock. At the time of the gift, he could have sold the stock for a loss of $1,200. Instead, he gave the stock to you. You get the full benefit of his basis when you sell the stock for a gain, but you are not permitted to claim a loss unless the stock declines in value after you receive it.
Note: In this situation, it is sometimes better for the donor to sell the stock and claim a loss, then make a gift of the sale proceeds. Otherwise, it is possible that no one will get the benefit of the donor’s basis in the stock.
Example: You bought XYZ for $30,000 but it now has a value of $12,000. You want to make a gift to your sister. If you give the stock, and your sister subsequently sells it for $12,000, no one will get a deduction for the $18,000 loss in value. If you sell the stock for $12,000 and give the cash to your sister, you can claim the $18,000 loss (subject to the capital loss limitation). If the idea is for your sister to own XYZ, she can use the $12,000 to buy this stock — preferably at least 31 days after your sale. The costs of this sale and purchase may turn out to be far smaller than the tax savings from being able to claim the loss.
Fair market value exceeds donor’s basis
If the fair market value of the stock at the time of the gift is greater than or equal to the donor’s basis, then your initial basis is the same as the donor’s basis, with a possible increase for a portion of the gift tax that was paid.
Example: Your grandmother bought 100 shares of Exxon many years ago. The stock has a fair market value of $8,500, but her basis is only $1,200.
Unless the gift tax adjustment described below applies, your initial basis in the stock is the same as your grandmother’s: $1,200. If you sell it for $8,000, you must report a gain of $6,800. This is true even though the stock went down in value while you were holding it.
Gift tax adjustment
Gift tax does not apply to most gifts because of the annual exclusion. The amount of this exclusion is adjusted for inflation from time to time. As of 2015 the amount is $14,000. If the donor is married and the spouse agrees to gift splitting, the donor can exclude double that amount.
Even if gifts to one recipient exceed the exclusion amount, the amount of gift tax paid may still be zero. This is because each donor has a lifetime credit that allows individuals to give significant amounts before the gift tax kicks in. As of 2015 that amount is $5,430,000.
If the gift tax applies, in spite of these exclusions, you may be able to increase your basis in the stock you receive. The increase applies only if the stock had a value greater than the donor’s basis at the time of the gift. (In tax lingo, this means the stock was appreciated.) In this case, your basis includes the portion of the gift tax that relates to the stock’s appreciation. Here’s how you figure the basis increase.
- Step 1. Determine the amount of appreciation for the gift. This is the fair market value of the property minus the donor’s basis. For example, suppose your aunt gave you stock with a value of $50,000, and she had a basis of $20,000. The appreciation is $30,000.
- Step 2. Determine the appreciation ratio. This is the amount of appreciation (determined in step 1) divided by the amount of the gift. In our example, the appreciation ratio is 60% ($30,000 divided by $50,000).
- Step 3. Determine the amount of gift tax paid on the gift. Let’s say your aunt paid $9,000 gift tax on this gift.
- Step 4. Multiply the gift tax by the appreciation ratio. In our example, you would get $5,400 (60% times $9,000).
In this example, you end up with a basis of $25,400, which includes your aunt’s basis of $20,000, plus $5,400 gift tax adjustment.