When stocks are exchanged as gifts, the IRS requires taxes to be paid on them. The purpose of enforcing the gift tax code is to ensure that taxes are paid on items that otherwise would evade taxation. There may be tax consequences for both the stock giver and the stock recipient.
Taxes for the Giver
The person who buys the stock and gifts it to another does not have to pay capital gains on the stock, but may need to pay the gift tax. There is usually only a gift tax if you donate several thousand dollars worth of stock to another person. The tax code changes from year to year, so you will need to consult a financial adviser to find out if the amount of stock you wish to gift will incur a gift tax fee.
Taxes for the Recipient
The person who receives the gift of stock will need to pay capital gains on it when it is sold. Taxes are valued based on how much the stock was worth on the day it was gifted. For example, if someone bought the stock for $1,000 and the value increased by $100 the day it was given to the recipient, the capital gains taxes are based on a value of $1,100. The recipient may or may not need to pay capital gains on the stock if the value falls lower than its purchase price.
Inherited Stock Taxes
If you inherit some stock from a deceased individual, the value of the shares on the day your benefactor died is your basis figure. You must find the low and high prices for the stock on the individual's date of death, and then account for major events like mergers or stock splits. The only exception to the date of death rule is if the benefactor chose an alternate valuation date for the stock. This is usually stated as six months after the official date of death in order to reduce estate taxes.
Gift Tax Exclusions
The IRS allows people to give each other tax-free gifts that are worth less than a certain amount. The specific amount is set by the IRS and usually rises every few years. This means that people can give others monetary gifts up to that amount without paying any taxes on it. For example, you can give a gift of $10,000 each to your mother, friend, and neighbor every year without having to pay any gift taxes on it.
- Comstock/Comstock/Getty Images