When you receive a gift of stocks, bonds, or mutual funds, your cost basis is the same as the donor's cost basis except when it's not! Clear as mud?
It all depends on whether the donor's cost basis (called "carryover" basis by accountants) was more or less than the fair market value of the stock on the date of the gift.
The donor is the person who gave the stock to you. You are the donee, the person who received the gift.
If the carryover basis is less than the fair market value at the time of the gift, the answer is easy. Your cost basis is always the carryover basis (except see below for adjustments for gift tax paid.)
If the carryover basis is greater than the fair market value at the time of the gift, it gets a lot more complicated. You will actually not know your basis until you sell the stock because it will have a different basis if it is sold at a gain than if it is sold at a loss.
If the stock you received as a gift is then sold at a loss, your cost basis is the lower of either the carryover basis or the fair market value at the time of the gift. Accountants refer to this as the "lower of cost or market" rule.
If the stock you received as a gift is then sold at a gain, your cost basis is the carryover basis from your donor.
In some situations, you will end up not having a gain OR a loss when you sell the stock! How can this be? It happens when the sales proceeds are more than the cost basis for a loss (i.e. lower of carryover basis or market) but less than the cost basis for a gain (i.e. carryover basis.)
Let's look at an example: Your generous grandmother gave you 100 shares of General Motors for your birthday. Her cost basis (adjusted for spinoffs, splits, etc.) was $3.00 per share. At the time of the gift, General Motors was selling for $2.00 per share.
If you sell the GM for $4.00 per share, your cost basis is the carryover basis of $3.00 per share, for a gain of $1.00 per share.
If you sell the GM for $1.00 per share, your cost basis is the lower of cost or market, meaning a basis of $2.00 per share, for a loss of $1.00 per share.
If you sell the GM for $2.50 per share, you have neither a gain nor a loss! Your cost basis for gains is $3.00 per share (which would produce a $0.50 loss), while your cost basis for losses is $2.00 per share (which would produce a $0.50 gain.) Since both of these conditions are incompatible, no gain or loss is applicable to the sale.
How do you report non-recognition of gain or loss on your income tax return? • Report the sales proceeds on your tax return so that the IRS will be able to reconcile your return to your broker's Form 1099-B sales proceeds report. • List the amount of the sales proceeds as the cost basis in order to report a gain of zero. • Attach a statement explaining the circumstances that resulted in non-recognition of gain or loss. • You can use our Gift Calculator report to support your statement.
Your holding period is determined by the donor's acquisition date unless the stock declined in value since purchase. If the stock has declined in value since purchase, your basis will be the fair market value on the date of the gift and the holding period will start on the date of the gift.
Because the cost basis of a gift sold at a loss is the lower of cost or fair market value, you cannot gift a stock that is "under water" to your kids in order for them to take the loss for income tax savings on their return.
The same cost basis principles apply to gifts of bonds, notes, and mutual fund shares.
What are gift taxes? They are taxes owed by the person giving the gift (the donor) if the gift is in excess of the annual gift tax exemption allowance (currently $14,000 per year in 2013.) The donor has the option
to utilize part of his/her lifetime gift/estate tax exemption instead of paying the gift tax currently, but then less will be available later to shelter the estate from estate taxes. The rate of tax is the same as the estate tax. The tax is reported on Form 709 (see pdf files to the right for form and instructions.)
If the donor paid gift tax on the gift (where the value exceeded the annual gift limit and the lifetime gift exemption was not utilized), some or all of the gift tax paid will also increase your basis. The amount of the gift tax adjustment depends on rules in effect at the date of the gift. If the gift was before 1977, the gift tax increases your basis but not to an amount more than the fair market value at the date of the gift. If the gift was after 1976, your basis is increased by only the gift tax paid on the portion of the gift which represents appreciation over the donor's cost. Also, some states (Connecticut and Minnesota) assess gift taxes at
the state level. Consult your professional tax advisor for these special cases.
HELP! MY DONOR DIDN'T SAVE THE TRADE CONFIRMATION! If your donor doesn't have the original trade confirmation, a copy of the brokerage account monthly statement showing the purchase activity will suffice. Alternately, a letter from his or her brokerage firm confirming the date and cost is also sufficient. If the donor has absolutely no idea where the trade confirmation is or what it cost, but can remember approximately when the shares were acquired, you can go to the websitehttp://bigcharts.marketwatch.com/historical/ and obtain the historical cost for that day. Take the average of the high and low trading prices for that day and use the result as your cost per share. We have also found Yahoo Finance to be
an excellent source of historical prices if the stock is still trading.
If the website does not list your stock because it is no longer in existence due to mergers, etc., you can try calling a public library information hotline of a large library and ask the librarian to look up the stock price trading range for that particular day in the archived newspaper files. You then have to roll the cost basis forward by making adjustments for all stock splits and corporate spinoffs, mergers, and corporate reorganizations since that date.
INFORMATION FOR DONORS
Eight Tips to Determine if Your Gift is Taxable IRS Tax Tip 2012-62 published 3/30/2012
If you gave money or property to someone as a gift, you may owe federal gift tax. Many gifts are not subject to the gift tax, but the IRS offers the following eight tips about gifts and the gift tax.
1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2011 and 2012, the annual exclusion is $13,000.
2. Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.
3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.
4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).
5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:
• Gifts that are do not exceed the annual exclusion for the calendar year, • Tuition or medical expenses you pay directly to a medical or educational institution
for someone, • Gifts to your spouse, • Gifts to a political organization for its use, and • Gifts to charities.
6. You and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.
7. You must file a gift tax return on Form 709, if any of the following apply: • You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year. • You and your spouse are splitting a gift. • You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future. • You gave your spouse an interest in property that will terminate due to a future event.
8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.