When Stocks Are Gifted, Is the Tax Basis Stepped Up?

by Dick Nadler, CPA

When stocks are gifted, is the tax basis stepped up? Or is the tax basis gifted as well?

You determine a gifted stock's basis by doing the following:

1. Find out the purchase price the original owner paid for the stock plus the cost of any commission.
2. Find out what the sale price of the stock was at the close of business on the day the gift was made.

If the stock has gone down in value from the time the donor acquired it to the day of the gift, then the basis is the stock price on the day of the gift. If the stock has gone up, then the basis is the donor's original cost, including commission.

You will need to know these numbers should you eventually sell the stocks you receive. At that time, you will need to figure out if you should report a capital gain or a loss on your taxes. Advice from a certified public accountant or a personal financial planner can help you make the best decision as to when it is advantageous for you to sell.

The value of inherited stock, however, is usually based on the price it sold for on the day the original owner died. If the value is higher than what the stock was originally purchased for, then the basis is "stepped up." If lower, then it is "stepped down."

Incidentally, it is the donor who pays any taxes on a gift. The recipient of a gift, however, pays taxes on stock dividends and on capital gains. Likewise, heirs do not pay taxes on stocks they inherit. But they do pay taxes on dividends and on capital gains.

Dick Nadler, CPA, is principal of Nadler Accountancy Corp., Orangevale, Calif., and a member of the California Society of CPAs, Sacramento chapter. His e-mail address is dick@nadlercpa.com.

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