Over the next 25 years, the biggest transfer of wealth in human history will take place. Some $68.4 trillion will be transferred to younger generations through gifts and estate plans. And some of that wealth will be in the form of stocks. Which leads to the question, who pays capital gains tax on gifted stock? We’ll explain in this article.
Capital Gains
Capital gains are the increase in value of a capital asset when it’s sold for more than the price it was originally purchased at. Realizing a capital gain is a taxable event. There are two categories of capital gains:
- Short-term capital gains are realized on assets sold after owning them for one year or less.
- Long-term capital gains are realized on assets sold after owning them for more than one year.
Short and long-term capital gains both have to be claimed on your tax return but are taxed differently. Short-term gains are taxed as ordinary income based on your tax-filing status and adjusted gross income. Long-term capital gains are taxed at a lower rate than regular income; the rate depends on your income and marital status.
Long-term capital gains tax rates for 2022:
|
Filing Status |
0% |
15% |
20% |
|
Single |
Up to $40,400 |
$40,401-$445,850 |
$445,851 and over |
|
Married filing jointly |
Up to $80,800 |
$80,801-$501,600 |
$501,601 and over |
|
Married filing separately |
Up to $40,400 |
$40,401-$250,800 |
$250,801 and over |
|
Head of household |
Up to $54,400 |
$54,401-$473,750 |
$473,751 and over |
Gifted Stock
Gifted stock is just that, stock that someone gifts you. Perhaps a parent or grandparent gifts stock to a child or gifts stock after their death to family members via their estate plan. Gifted stock can be transferred through a brokerage account or an estate plan with a transfer on death agreement.
Gifted Stock and Capital Gains
The recipient of gifted stock pays the capital gains tax. The recipient assumes the giver’s cost basis, the original value of the stock for tax purposes, and their holding period. So if you sell the gifted stock immediately, it wouldn’t be subject to short-term capital gains, provided the gifter had owned the stock for at least one year before gifting it.
Inherited stocks and gifted stocks are not the same thing. Unlike gifted stock, inherited stock doesn’t take the original purchase price into account for tax purposes. The cost basis for inherited stock is the stock's market value on the date of the donor’s death.
Capital gains tax liability on gifted stock depends on the cost basis and holding period. If the gifted stock has increased in value, your gain when selling is taxed based on the original price of the shares. If the shares have depreciated after being gifted and you choose to sell them, the value on the date the stock was gifted will determine your capital loss.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
