Giving equity allows a friend or loved one to watch a stock, property or business grow. Equity-based gifts can be a double-edged sword, however. On one hand, the beneficiary receives what could someday be a commodity worth more than it is today. On the other hand, equity gifts come attached to potential tax liabilities, which must be tracked. In some cases, the way an equity is owned may affect whether you can gift it to someone else.
Equity gifted to a friend has no tax due until the asset is sold, so both the original cost basis and current value of the property at transfer are important numbers. The IRS recognizes the current value as the cost basis in situations where the property had lost value prior to the exchange. In all other cases, the IRS requires you to use the original owner’s cost basis when determining capital gains ramifications.
The IRS allows individuals to transfer in total an amount up to the estate taxable limit of $5 million, counting all lifetime gifts and the value of the estate at death. Gifts to a spouse don’t count against this limit. Gifts to anyone else only count if the amount of each individual's gifts total more than the annual exclusion amount in a calendar year, which is $13,000 as of the time of publication.
Ineligible Equity Gifts
Gifts in a retirement tax shelter, such as an IRA, Roth IRA or 401k plan, may not be gifted to friend. To gift funds from these accounts the owner must sell assets and exit the tax shelter first, satisfying any withdrawal requirements, such as taxes or penalties due. Education tax shelters, such as 529 plans, have provisions allowing the owner to change beneficiary to a family member, so plans may be gifted to another recipient by changing from the original named beneficiary.
For estate purposes, the IRS excludes gifts to spouses, gifts below the annual exclusion amount for the calendar year ($13,000 in as of the time of publication), tuition and medical expenses paid for someone else and gifts to a political organization for its use from the computation to determine a taxable gift. No gifts of equity are excluded from capital gains tax consideration.
The donor must file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, if the gift is above the annual allowable exclusion amount. Although this form must be filed by the annual income tax return due date, no tax is due until the donor reaches the lifetime exclusion limit. For capital gains tax purposes, tax filing is only due the year the equity asset is sold.
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