Taxes on a Gift of Stock
If you give appreciated securities to children, the amount they’ll pay in taxes when they sell depends on whether they receive the shares while you’re still alive or as an inheritance.
Question: If I give long-term appreciated stock to my daughter, what will be her cost basis when she sells the stock?
Answer: One of the downsides to giving appreciated stock is that your daughter’s basis when she sells the shares will be your original cost basis. So if you give your daughter securities that you purchased for $10 a share, and she decides to sell them when they’re worth $50 a share, she’ll have to pay capital gains taxes on the $40-per-share increase in value—regardless of the value of the investments when you gave them to her.
The capital gains tax rate she’ll pay will depend on her income. (Thanks to the new tax law that passed last year, capital gains tax rates are now pegged to income instead of an investor’s tax bracket.) For 2018, investors will pay 0% on long-term capital gains (investments held longer than a year) if their taxable income is less than $38,600 for single filers, $51,700 for heads of household or $77,200 for joint filers. They’ll pay a rate of 15% if their taxable income is up to $425,800 for singles, $452,400 for heads of household or $479,000 for joint filers. Above those income levels, the capital gains rate is 20%. (High earners may also have to pay a 3.8% net investment income tax.)
If you’re looking to give money to your daughter and minimize taxes, you may want to transfer other types of assets instead, such as cash or investments that haven’t increased in value as much.
The tax situation is different for inherited assets. When someone inherits appreciated stock after the original owner dies, the tax basis is stepped up to the investment’s value on the date of death. As a result, the heir avoids capital gains taxes on the increase in value while the original owner was alive. If the original owner purchased the stock for $10 and it was worth $50 when he died, the heir would only have to pay capital gains taxes on any increase in value over $50 upon the sale of the shares.