How can we determine the cost basis of stock that we received as a gift?
If you have been assuming that to be able to conduct the determination of liability regarding the gift tax, the value that is associated with a gift of stock is regarded as being gifted shares cost basis, this article will shed more light on the real situation regarding this type of issue. Thus, it is understood from this vantage point that when someone is given a gift of stock, there is the placement of a different value for the sake of gift purposes as well as income tax purposes. Liability for gift tax is founded on what is regarded as fair market value in terms of the date when the gift is actually received. Liability in terms of income tax, which is set forth when the receiver decides to sell the stock, is founded on both the holding period of the stock and the cost basis of the designated shares of the stock.
A lot of issues can arise.
It cannot be denied that stock gifts can cause the rising of many issues about taxation. This is because there are various methods for determining the value of the stock based on if the stock is for the sake of income tax or gift purposes.
The possibility of possessing a liability for gift tax is applied only to the one who donates more than a designated cap off-limit, such as fifteen thousand dollars or more in the year 2020, to an individual in the span of a year.
Calculating the cost basis on gifted stock
The one who received the gift is not required to pay a tax on the gift. However, when the person moves forward with selling the stock, there is the requirement to derive the calculation of a value of the stock for the sake of income tax.
The giver’s original cost basis determines the cost basis of the stock that the person received as a gift (“gifted stock”) and the fair market value (FMV) of the stock at the time he or she received the gift.
There are 3 solutions :
1) If fair market value (FMV) is more than the original cost basis, a person should use the original cost basis during the selling process.
2) If fair market value (FMV) is less than the original cost basis, a person who sold the stock for more than the original basis should use the original cost basis in the calculation.
3) If fair market value (FMV) is less than the original cost basis, a person sold the stock for more than the original basis but less than the fair market value at the time of the gift, then selling price will become a cost basis.
Important rule:
Determining the value of the stock for the sake of gift tax
The tax basis of gifted stock: The value of a gift of stock for liability regarding gift tax is not considered the cost basis of the donor. Instead, the value regarding a gift of stock in light of the issue of liability for gift tax is considered the market value of the stock when the gift is provided to the recipient. Take into consideration, for example, that you bought one hundred shares of a particular type of stock at a rate of fifty dollars for each share. The cost basis then, is noted as being five thousand dollars. At present, the stock is now eighty dollars per share, and you decide to give the stock as a gift to someone. Thus, it is noted that the determined value concerning your gift is eight thousand dollars for the sake of gift tax.
For the year 2020, someone could contribute as much as fifteen thousand dollars to a limitless number of people per year while there was no need to report such gifts or pay a tax on those gifts. If there was the giving of more than fifteen thousand dollars to any particular person, then the scene changed. It was necessary to include a report of the gift when filing taxes. However, there was no need to make any payment of taxes until there is the giving away above eleven million four hundred thousand dollars, which is the present limit for a lifetime–regarding the amount mentioned in the sample as well over the amount of fifteen thousand dollars each year for each person.
Thus, regarding the example, there is no liability for gift tax. But in such cases that the stock was worth two hundred dollars per share, then the gift’s determined value would be designated as twenty thousand dollars. This would make it necessary to conduct a report for this amount, which means that five thousand dollars would undergo an application about the lifetime exemption of eleven million four hundred thousand dollars.
Determining the value of the stock for the sake of income tax
The person who receives the gift is not responsible for any gift taxes when receiving the gift of stock. On the other side of the spectrum, it is noted that in such an instance, if the person chooses to sell the stock, then there is the issue of determining the valuation of the stock for the sake of income taxes. It is at this point that complexities can develop.
It is a typical setting that when it comes to determining the value regarding a gift of stock for the sake of liability linked to capital gains tax, the cost basis of the donor and the holding period is applied. Take into consideration, for example, that your grandfather provides you with a gift of stock. He purchased the stock at a rate of ten dollars for each share. When you receive the gift of stock, it has a value of fifteen-dollar for each share. If you decide to move forward with selling the stock, no matter if there is the deriving of a loss or a gain, your cost basis will be regarded as equivalent to that of your grandfather’s cost basis at a rate of ten dollars for each share. If you sell the stock at a rate of twenty-five dollars for each share, then you will be required to pay tax based on either the short term rate or the long term rate, which takes into consideration the length of time that your grandfather had owned the stock. This will be applied to a gain of fifteen dollars per share. If you conduct the stock’s selling at eight dollars per share, then it is determined that two dollars will be your capital loss for each share.
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