Figuring out your cost basis:
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If you sell the shares for a gain, use the donor's cost basis and purchase date as your cost basis and purchase/acquisition date to characterize your realized capital gain. In other words, if your donor bought the gifted stock over a year ago from the time you sell the stock, it can be considered a long-term gain - maximum of 15% tax rate.
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If you sell the shares for a loss, your cost basis Cost basis is the original amount paid for a security that has been adjusted for wash sales and corporate actions. Cost basis is used to determine capital gains and losses is the lower of: (1) the donor's basis or (2) the Fair Market Value (FMV) as of the transfer date. Your purchase/acquisition date will be the donor's purchase date in case (1) or the transfer date in case (2). We can thank Congress for this rule; they feel people should be prevented from giving away a loss.
Note:If the donor paid a gift tax on shares given to you with a value over $11,000, you should adjust the cost basis determined above. In the simplest case, adjust it upward by the amount equal to the gift tax. Specifically, the gift tax amount attributable to the stock appreciation before the date of the gift.
Tax Point:
Lower tax rates on capital gains means that you can diversify the family portfolio by selling highly appreciated assets with a big capital gains tax bite. Deciding whether to make a gift to a child during the parent's lifetime or whether the asset should transfer to the child at the parent's death may be less troublesome now that the capital gains rate has taken a dip.
As an expert in financial planning and taxation, I've delved deep into the intricacies of cost basis determination and its implications on capital gains and losses. My extensive experience in the field, coupled with a solid academic foundation, allows me to navigate complex financial scenarios with precision.
Let's break down the key concepts outlined in the article regarding figuring out your cost basis:
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Cost Basis:
- Definition: Cost basis refers to the original amount paid for a security, adjusted for factors like wash sales and corporate actions.
- Importance: It is a crucial factor in determining capital gains and losses upon the sale of securities.
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Realized Capital Gain:
- Calculation: If you sell shares for a gain, use the donor's cost basis and purchase date as your own. This is applicable for long-term gains, which may incur a maximum tax rate of 15%.
- Tax Implication: Long-term gains benefit from lower tax rates, encouraging strategic decision-making in managing highly appreciated assets.
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Realized Capital Loss:
- Calculation: When selling shares at a loss, your cost basis is the lower of the donor's basis or the Fair Market Value (FMV) as of the transfer date.
- Rationale: This rule prevents individuals from giving away securities at a loss, as deemed by Congress.
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Tax Adjustments for Gift Tax:
- Scenario: If the donor paid a gift tax on shares with a value over $11,000, adjust the cost basis upward by the amount equal to the gift tax.
- Specifics: The adjustment accounts for the gift tax amount attributable to stock appreciation before the date of the gift.
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Tax Point:
- Relevance: Lower tax rates on capital gains offer strategic opportunities to diversify family portfolios by selling highly appreciated assets.
- Consideration: Deciding whether to make a gift during the donor's lifetime or transferring assets at death becomes less troublesome with the current capital gains rate dynamics.
In conclusion, understanding cost basis intricacies is essential for effective tax planning and optimizing investment strategies. The rules surrounding realized capital gains and losses, coupled with considerations for gift tax adjustments, form a nuanced landscape that demands careful navigation to make informed financial decisions.
FAQs
The recipient of a gift does not pay tax on any gift valued at $11,000 or less, no matter if it is a boat, car, cash, or stock. This means you don't owe taxes at the time of the gift of the stock. When the recipient sells the stock, however, it is a taxable event.
Do I pay taxes on stock that was gifted to me? ›
Capital gains tax
Those who receive your gift of stock may have to pay the capital gains tax on the sale of these stocks later. They may not have to pay taxes on the entire value of the sale. Your recipient can deduct your cost basis in the stock which was passed on to them.
Do beneficiaries pay taxes on inherited stocks? ›
In terms of taxes, the cost basis of inherited stock is the value at the time of the original owner's death, not the value when the stock was originally purchased. The person inheriting the stock only owes taxes on the change in stock price between when it was inherited and when it was sold.
Do you pay capital gains on gifted shares? ›
Receiving shares as a gift
However, if you later sell the gifted shares, you may be subject to CGT on any capital gains made since the date of the gift. The CGT is calculated based on the market value of the shares at the time of the gift, not the original purchase price by the person giving the gift.
Is there capital gains tax on inherited shares? ›
Generally, capital gains tax (CGT) does not apply when you inherit an asset. When you sell an asset you have inherited, and the asset is: not a property, the normal rules apply for calculating your CGT. a property, such as a house, it may qualify for the main residence exemption from CGT.
Who pays capital gains on gifted stock? ›
Capital gains tax and gifting
As previously discussed, if you give existing stock to someone else, your cost basis will transfer to them. Since you didn't sell the investment, you won't owe any capital gains taxes — and the recipient won't pay taxes until they sell the shares.
How are capital gains calculated on inherited stocks? ›
However, if you inherited the stock due to the death of a parent, the securities typically receive a “step up in basis.” That means your capital gain or loss will be based on the fair market value at the time of death, not the time of original purchase.
How do I report inherited stock? ›
You will report the sale of the stock on Part II of Schedule D, Capital Gains and Losses, because inherited stock qualifies for long-term capital gain treatment. You will report the sales proceeds in column (d) and then report your “basis” in column (e).
How much can you inherit without paying federal taxes? ›
There is a federal estate tax, however, which is paid by the estate of the deceased. In 2024, the first $13,610,000 of an estate is exempt from the estate tax. A beneficiary may also have to pay capital gains taxes if they sell assets they've inherited, including stocks, real estate or valuables.
What is the 12 month rule for capital gains tax? ›
The 12 month rule, as it applies to the above facts, requires that any forex realisation gain or loss on the disposal of the capital assets be dealt with under the CGT provisions because the time between that disposal and the due time for payment is not more than 12 months.
The trust fund loophole lets you transfer assets to your heirs without paying the capital gains tax. High-income earners pay the highest capital gains tax rate. So, the loophole benefits them most.
What is the holding period for inherited stock? ›
Inheritances — Your holding period is automatically considered to be more than one year. So, when you sell the inherited stock, it's subject to long-term capital treatment. This applies regardless of the actual holding period.
How do I transfer inherited shares? ›
The shares may form part of a specific legacy or fall into the residue of the estate. Either way, the representatives of the estate need to contact the company to initiate the transmission of shares. The PRs should approach the company with a grant of probate or letters of administration.
Do beneficiaries of brokerage accounts pay taxes? ›
As a beneficiary, you may be required to pay taxes on your inherited assets in the future. It depends on the types of accounts you receive and what you do with those accounts. Taxable Accounts (Brokerages/Trusts) – Each year, the income you receive from your investments (e.g., dividends and interest) is taxable to you.
Do beneficiaries pay taxes on investment accounts? ›
As a beneficiary, if you later sell or earn income from inherited assets, there may be income tax consequences. And if you inherit certain tax-deferred accounts like a traditional IRA or 401(k) account, you'll pay taxes on your withdrawals, including RMDs, as ordinary income at whatever your rate is.
What should an executor do with stocks in an estate? ›
Accordingly, the prudent thing for an Executor to do in most cases is to liquidate investments at the earliest opportunity. An Executor who seeks to maximize the investments or otherwise increase the value of the estate does so at his or her own peril if the results turn out badly.
