A position in the stock market is a unique gift — and depending on the stock itself, it could be quite lucrative. Of course, the receiver isn't immune to capital gains taxes just because it's a gift.
Whether you are being generous with a gift for your children, friends, or a charity, here are some considerations on taxes of gifted stocks in the U.S.
Receiver of the gift will pay taxes upon selling
If the gifted stock grows in value by the time it's sold, the gift receiver will incur what's called "capital gains" or profit. With this realized profit comes capital gains taxes, which the receiver is responsible for.
There are two types of capital gain taxes — short term and long term.
Short-term capital gains follow the same rate as income tax and they are applicable if a stock is held for less than one year. In contrast, long-term capital gains are taxed at a lower rate (anywhere from 0–20 percent for the 2020 tax season, depending on the person's income class) and apply for stocks held for a year or more.
Make sure that the receiver of your gift knows to hold the stock for a longer period of time to minimize taxation.
How to figure out taxes owed on gifted stocks
There are a few key metrics you will need to consider when figuring out how much you owe on a gifted stock.
First, you should know the cost basis or the price at which the stock was purchased. The gift receiver should be able to see this on their brokerage account after the shares have been transferred. However, the gift giver may want to consider keeping this number somewhere for future reference.
You will also want to know the fair market value of the stock when it was gifted. This is important because a stock may have been transferred as a gift days, months, or years after it was first purchased.
Also, you will need to know how long you held the stock. This is mainly in regards to short-term versus long-term capital gains.
Gifting stocks means understanding the gift tax
In the U.S., a person must report any single gift above $15,000 to the IRS. Once reported, it goes against your lifetime exemption limit, which is currently $11.58 million for one person. However, multiple gifts below that value don't need to be reported.
Gifts above $15,000 incur a gift tax of 18–40 percent. It's worth avoiding this if possible, even if you have to send multiple gifts to get around it. After all, nobody wants to lose nearly half of their gift to Uncle Sam.
Gifting stocks to charity means exemption eligibility
As a gift giver, you can write off a gift to a public charity (including gifted stocks) on your own taxes. However, there's a limit — half of your adjusted gross income for the year.
In contrast, gifting stocks to individuals won't grant you an exemption, but it could put you in good graces with your loved ones.