Tax deductions or taxes due can come from gifts of stock, depending on who's giving and who’s receiving. If you receive stock, knowing what information you need from the donor helps you avoid a headache at tax time after you sell the stock. If you gave stock away, the recipient could be the difference between owing gift taxes and receiving a tax deduction.
Receiving Gifted Appreciated Stock
You don't owe taxes on stock that you receive as a gift until you sell it because gift taxes can apply only to the donor, not to the receiver. Your basis in a stock is the amount you are credited with paying for it. The basis used to determine whether you have a gain or loss when you sell the stock. When you receive stock as a gift, your basis depends on the donor's basis and the fair market value of the stock at the time it is gifted. If the stock's FMV is greater than the donor's basis, your basis is the same as the donor. For example, if the donor had a $5,000 basis and the stock is now worth $6,000, your basis is always $5,000.
Basis for Stock With Lower FMV
If the FMV of the stock is less than the donor's basis, you have two bases in the stock, depending on the price for which you eventually sell the stock. If you sell the stock for more than the donor's basis, you calculate your gain using the donor's basis as your own. If you sell for less than the FMV of the stock when you received it, you use the FMV at the time you received it to calculate your loss. If you sell the stock at a price between the FMV when you received it and the donor's basis, you don't have a gain or a loss. For example, the rule applies if the donor has a basis of $5,000 for the stock and gives it to you when it is worth $4,000. If you then sell it for $6,000, you have a $1,000 gain because you use the donor's basis. If you sell it for $3,000, you have a $1,000 loss because you use the FMV as the basis. If you sell it for $4,500, you have no gain or loss.
Giving Stock to Others
You can give up to $13,000 to each person, each year before you have to file a gift tax return. For example, if you give $20,000 to your brother, up to $7,000 could be subject to the gift tax. If you're married, you and your spouse can give up to $26,000 to each person, per year. In addition, you can exclude gifts made to pay for tuition or medical expenses of any amount, gifts to your spouse, gifts to a political organization and gifts to charitable organizations.
Donating Stock to Charity
If you gift stock to charity, you can claim a tax deduction if you itemize on your tax return. The amount of the deduction depends on how long you've held the stock. If it's for a year or less, you're limited to deducting the amount you paid for the stock or its fair market value, whichever is less. If you've held the stock for more than a year, you can deduct the fair market value of the stock, even if it's more than your basis.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."