A gift of stock can teach some useful lessons in personal finance, business operations, the stock market and taxes. There's certainly no law against the transfer of stock as a gift, but it might result in tax consequences for the giver and receiver.
How to Gift Shares
The majority of stock shares are held in book-entry form, meaning they exist only as entries on a broker's internal bookkeeping system. The simplest method of gifting shares of stock would be to instruct your account custodian to complete a book-entry transfer into the receiver's bank or brokerage account. If you hold physical stock certificates, they must be signed on the back and then provided to the broker or the company's transfer agent before reissuance to the receiver.
Cost Basis and Capital Gains
Anytime you buy a stock, or any other valuable asset, the price you paid represents the cost basis of that asset. The Internal Revenue Service also considers any commissions or fees paid as part of the basis. When the stock is eventually sold, the proceeds received over the cost basis amount represent the capital gain on the transaction, which is taxable. If you give shares of stock to somebody, he assumes your cost basis for his tax purposes. You would not be responsible for capital gains on his sale of the shares.
Gift Tax Exclusions
The IRS levies taxes on gifts; in theory, you must pay a percentage of the gift value in the year you make the gift. However, the law also provides for annual and lifetime exclusions that exempt gifts up to a certain value from taxes. As of the time of publication, the annual exclusion reached $14,000 per year for individuals and $28,000 per year for married couples. The lifetime exclusion stood at $5,340,000, rising to $5,430,000 for tax year 2015. Gifts under these amounts, either on an annual or lifetime basis, are not subject to any gift tax.
Capital Losses on Gifts
If the value of your gifted shares should diminish after you transfer them, the receiver may be able to claim a capital loss when she sells them. The proceeds received from the sale would have to be less than the cost basis. If this happens, the loss can offset any capital gains the recipient realized in the same year. Net capital losses on all transactions can be taken as a deduction from income, up to an annual limit of $3,000 for all losses combined. If the loss exceeds this amount, the leftover amount can be carried over and claimed for the next tax year or used to offset any capital gains in a following year.
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Writer Bio
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.