You own some stock that has increased in value. To avoid a possible taxable gain by selling the stock, you wish to give it directly to a child or grandchild. The simple idea of gifting stock has some interesting tax consequences to consider.

The value of the gift

When you gift stock, there are not one but two values to consider.

1. Gift value. This is the market value of the stock at the time of your gift. Since there is a possible gift tax to you if the value of all gifts given by you to a person during the year is $19,000 or over ($38,000 for a married couple), you will need to calculate this value prior to finalizing your decision to provide the gift.
2. Value (basis) of the stock. You need to determine the cost to you at the time you originally purchased the shares. This includes any brokerage or other fees. Provide the date(s) you purchased the stock and these costs to the person who will be receiving the gift.

Providing important information

Basis is key. Those receiving your direct gift of stock are not required to sell it. But when they do, they will need to know the following:

• The original cost of the stock and when it was purchased
• The date and fair market value of the stock when it was given
• If the giver paid any gift tax

Timing is important. If the recipient of your gift sells the stock right away, the tax rate applied will depend on the length of time the stock was owned by you. A gain on a stock held one year or less is considered ordinary income. More than one year is a long-term capital gain. The time frame for this calculation usually goes all the way back to your purchase records.

The benefits of gifting stock

• No taxes. Gifts of stock allow you to avoid paying capital gains tax on the ownership transfer. As long as annual gift amounts to one person are less than $19,000 ($38,000 for a married couple), there is no tax consequence.
• Lower taxes. In addition, the future sale of the stock could result in lower taxes. This is because long-term capital gains tax rates can range from 0% to 20%. Short-term capital gains tax rates can be as high as 37%. An additional 3.8% Medicare tax or net investment income tax may also apply. Assuming your child or grandchild has lower income than you, the resulting sale creates a potential tax savings. Care must be taken if the gain is high, as the Kiddie Tax rules could create a tax bite at the parents’ tax rate.
• Kiddie Tax benefit. If the gift stock pays dividends, future dividend income can potentially be taxed at your recipient’s lower tax rate. This technique can be used to provide dividend income without a child having to pay any taxes up to the Kiddie Tax annual limit in 2026 of $2,700 ($1,350 of unearned income is tax-free, and the next $1,350 is taxed at the child’s tax rate).
• Gift to anyone. Your gift can be provided to anyone you wish, not just a relative. These gift rules also apply to other investments, such as mutual funds, land, and other property.

Some wrinkles when gifting stock

1. If your stock is losing value, it is usually better to sell it and take the tax benefit of the loss. If the stock you gift has a fair market value less than your cost, providing the information noted here to the recipient of your gift is even more important.
2. It is no longer your property. When gifted, it is owned by the recipient. This is not a problem for your child, but it could be if it is a grandchild or if the child reaches adulthood. So a grandchild going through a parent’s divorce could create an interesting scenario.
3. This property could impact future aid. If your gift is to a child and the funds are intended for future educational needs, the value of the stock could affect the amount of federal aid they receive.

Please ask for help if you are considering a gift of stock or property. If handled incorrectly, your gift could create unforeseen tax consequences. But when used in conjunction with other contribution techniques, it can be a powerful tax-planning tool. Contact our RRBB advisors today.