What is the gift that truly keeps on giving? Stock!
By gifting investments, you can help give your loved ones a brighter financial future. And especially with younger gift recipients, time is on their side — even a relatively small gift can grow into a sizable investment later in their life.
But does the IRS come into play when you gift stock?
Maybe. It depends on the size of the gift and a few other factors.
This guide will discuss stock gift tax, providing actionable advice on how to maximize your giving while minimizing tax headaches.
What Is Stock Gift Tax?
The term “stock gift tax” refers to federal gift tax, a tax that the IRS imposes on gifts. The gift tax can apply to any gift of value — whether that’s stocks, a new car, or a cash gift.
In other words, gift tax can apply to any gift — not just gifted equities.
However, there are some unique considerations when it comes to gifting stock. There are essentially two tax implications that readers should understand:
- Gift tax implications, which apply to any type of gift
- Capital gains tax implications, which are unique to gifted investments
Note: Gifts of stock aren't tax-deductible unless gifted to a charity that qualifies through the 501(c)(3) organization.
We’ll discuss both of these concepts in greater detail below. Let’s start with the gift tax.
Gift tax basics
Gift tax is a federal tax that applies whenever a gift is given. The IRS defines a “gift” as the transfer of an item without compensation or without fair compensation based on the market price.
For example, giving someone $500 or a $20,000 car would be considered a gift. But giving someone a $20,000 car in exchange for $20,000 cash would be considered a sale.
However, if you “sell” a $20,000 car to a friend for only $5,000, the IRS may consider the $15,000 difference to be a gift.
Gift tax is almost always paid by the gifter, not the recipient. If you give your nephew $50,000 to help with a house down payment, you will have to file a gift tax return, but your nephew won’t.
Fortunately, there are generous gift tax exclusions that make it so gifts up to a certain amount won’t actually result in any tax liability.
However, even these larger gifts won’t usually result in any gift tax liability, thanks to the generous lifetime gift tax exemption (more on this below).
Note: When making very large gifts, it’s wise to consult a CPA, tax advisor, or qualified financial advisor.
Gift tax limits and exclusions
Fortunately, the gift tax has two generous exclusions that mean that most gifts won’t actually be taxed at all.
There are two exemptions to be aware of:
Annual gift tax exclusion
For 2022, the annual gift tax exemption is $16,000 per year, per person, and per recipient. This exemption effectively means that you won’t need to report any gift under $16,000, and it won’t result in any gift tax. (In 2021, the annual limit was $15,000.)
This annual exclusion limit is per person, meaning that couples filing taxes jointly can gift up to $32,000 per year tax-free.
It’s also per recipient, meaning that a couple could gift each of their three children up to $32,000 each per tax year without filing a gift tax return.
Lifetime gift tax exclusion
Each individual also has a lifetime gift tax exemption, which is set at $12.06 million for 2022 (the figure may change in future years).
This means that everyone can gift up to $12.06 million over the course of their lives without paying any gift tax — and this is in addition to the annual exemptions.
Any gifts of over $16,000 must be reported to the IRS using Form 709. The value of the gift exceeding $16,000 will then be applied to the lifetime exemption.
For example, a single person gifting a friend $50,000 would require a gift tax return. $16,000 would be exempted via the annual gift tax exemption, and the remaining $34,000 would apply to the individual’s lifetime exemption. No tax would be owed unless the individual has already used up the $12.06 million exemption limit.
The main takeaways here are:
Gifts under $16,000 don’t need to be reported and won’t be taxed as of 2022.
Gifts over $16,000 must be reported but likely still won’t be taxed due to the lifetime exclusion.
Capital gains tax basics
Capital gains tax comes into play whenever you sell an investment or an asset. You’ll owe tax on the profits of the sale.
For instance, let’s say you purchased a stock for $10,000 and sold it five years later for $15,000. The $10,000 is your cost basis, and the $15,000 is the sale price. You would owe capital gains tax on the difference between these two numbers, or $5,000 in this case.
How does this apply to gifting, though?
In that same example, let’s say that you give $15,000 of stock to your niece. In this case, you didn’t actually sell the stock, so you won’t owe any capital gains.
However, when your niece eventually sells those stocks, she will owe capital gains tax. And to calculate her profits on the appreciated stock, she must use your original cost basis.
For example, let’s say she holds onto the stock for another five years before selling it for $19,000. Now, she will owe capital gains taxes on $9,000 of profits ($19,000 - the $10,000 original cost basis).
Where it gets a bit confusing is that the original cost basis transfers with the gift, but the value of the gift is based on the market value on the date of the gift.
In other words, you would be gifting your niece $15,000 for gift tax purposes, but the $10,000 cost basis would transfer to her for capital gains tax purposes. We’ll discuss this in greater detail later in this guide.
How to Value Gifted Stock
When gifting investments, you must take into account the current value of the stocks, as well as how much you originally paid for them.
The two terms to know here are “fair market value” and “cost basis.”
Fair market value
The value of the stocks on the day of transfer will be considered the fair market value. This is the figure used to calculate gift tax.
For example, if you gift someone $100,000 worth of an S&P 500 index fund, the fair market value of that gift is $100,000. You’ll need to file a gift tax return using this value.
Fair market value is typically determined by the closing price of the securities on the day of the transfer. (The closing price is the last price the stock was trading at during that trading day.)
For fair market value, it doesn’t matter what you originally paid for the stocks.
The original cost of the stocks is referred to as the cost basis, or just “basis.”
When gifting “new” stocks, such as buying stock directly in a family member’s brokerage account or sending them money to purchase an investment, you don’t need to worry about cost basis. In this case, gift tax considerations are the only thing you’ll need to keep in mind.
Example: You contribute $500 cash to your granddaughter’s college investment account. You don’t need to worry about any capital gains or cost basis considerations.
When gifting existing stocks, such as transferring 150 shares of stock to a family member, you’ll need to think about the cost basis. In this case, your original cost basis will transfer to the gift recipient, becoming their cost basis.
Example: You transfer 150 shares of XYZ stock to your son’s investment account. You need to note your original cost basis and inform your son of the original cost for tax planning, as the cost basis will transfer to him.
The key consideration here is that when you gift an existing investment, your original cost basis will transfer to the gift recipient.
For instance, if you purchased 150 shares of XYZ for $100 per share ten years ago, your original cost basis would be $15,000.
If you then gift these 150 shares to your son, that $15,000 cost basis would transfer to him. When he eventually sells the shares, he will owe taxes on the profits (the sales price - the original cost basis).
If the investment has grown substantially and now trades for $250 per share, the son could sell the investment for a total of $37,500. He would then owe capital gains tax on $22,500 of profit ($37,500 - $15,000).
Capital Gains Tax Considerations
Capital gains tax comes into play whenever an investment is sold. There are two types of capital gains, depending on the length of the holding period:
- Long-term capital gains apply to investments held for more than one year before being sold. They are taxed at 0%, 15%, or 20%, depending on your income bracket.
- Short-term capital gains apply to investments held for less than one year before being sold. They are taxed at your normal income tax rate (12-37%, depending on income level).
In most cases, it will be beneficial to hold investments for at least one year before selling to take advantage of lower long-term capital gains rates.
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.
For the gifter, gifting shares instead of cash can make financial sense. This is particularly true for high-income earners that would pay higher capital gains tax rates.
To illustrate, let’s say you have $100,000 worth of stock that you originally purchased for $50,000 a few years ago.
If you sell the shares, you’ll owe capital gains tax on $50,000 of profit. Depending on your tax bracket, this could result in up to $10,000 in taxes — leaving you with only $90,000 to gift.
If you instead gift the $100,000 worth of stock, you won’t pay anything in capital gains tax. And if the recipient is in a lower tax bracket, they will pay a lower tax rate (or perhaps nothing at all) when they eventually sell.
These principles can also come into play during the estate planning process. Making frequent gifts throughout your lifetime may help avoid hefty estate tax bills — but it’s best to speak with a qualified tax advisor for detailed estate planning strategies.
Examples of Tax Implications from Gifted Stock
To illustrate everything we’ve learned here today, let’s explore two examples.
Scenario 1: A gift of $10,000 worth of stock to one recipient
- You decide to give $10,000 worth of stock to your close family friend.
- You originally purchased the shares for $3,000.
- You transfer the shares to the recipient’s account, resulting in a taxable gift of $10,000.
- Since the gift is under the $16,000 annual gift tax exemption, you don’t have to file a gift tax return or pay any gift tax.
- Your friend won’t owe any gift tax and won’t need to report anything.
- The cost basis of $3,000 transfers to your friend.
- When they eventually sell the stock, they will owe capital gains tax on the profit (calculated as the sales price minus the original $3,000 cost basis).
Scenario #2: Two gifts of $150,000 worth of index funds to two recipients
- You and your husband decide to give $150,000 worth of index funds each to your daughter and son, for a total giving of $300,000.
- You originally purchased the funds for $80,000 each ($160,000 total).
- Because each gift is over the $32,000 annual exemption ($16,000 per parent), you’ll need to file gift tax returns.
- Each recipient is treated independently for exemptions; you can exempt the first $32,000 from each $150,000 gift.
- You’ll owe gift tax on $118,000 from each gift ($236,000 total).
- This $236,000 will be deducted from your lifetime exemption.
- You won’t need to pay any gift tax, as long as you haven’t used up your lifetime exemption ($24.12 million for couples).
- The cost basis of $80,000 will transfer to each recipient.
- When the recipients eventually sell the mutual funds, they will each owe capital gains tax on the profit (calculated as the sales price minus the original $80,000 cost basis).
Gifting Stock to Children with EarlyBird
If your goal is to gift investments to the little ones in your life, the simplest method is to use EarlyBird.
EarlyBird makes it simple for anyone to invest in the futures of loved ones. Here’s how it works:
- A parent, guardian, or other loved one can set up a custodial account on behalf of a child.
- Anyone can then contribute funds to the account.
- The money can be invested into one of several portfolios, using a mix of stocks, bonds, and even cryptocurrencies.
- Friends and relatives can contribute to the account, and the money will grow over time.
- When the child becomes a legal adult, they are given full access to the account.
- Funds can be used for college, a down payment, a business venture, or any other purpose.
Want to learn more? Check out the EarlyBird FAQ for answers to common questions.
Gifting investments can be hugely beneficial for the recipient and may even result in tax benefits for the gifter.
However, it’s vital to understand all the tax implications so that you don’t wind up with a surprise tax bill.
The information in this guide should give you everything you need to maximize your gifts while minimizing taxes. For more helpful insights, check out our guide on how to avoid gift tax.
Finally, remember that it’s always a good idea to consult a tax professional before making any large transfers or gifts.