We love a unique gift idea, no matter the time of year. Stocks are a real gift that keeps on giving, but it’s important to be aware of the tax implications that go along.
Despite the ongoing economic crisis that started in 2020, investment trading volumes have remained elevated. Options contracts saw a 50% increase throughout the last year while daily average trades by major retail brokerages reached new heights. It’s at a time like this when it’s not just generous, but smart to give stock as a gift. Here are the tax implications, so both the giver and receiver can be well-informed.
- The gift receiver pays capital gains taxes on their stock returns, but only after they sell.
- Short-term and long-term capital gains taxes apply here.
- Gift givers can take on the burden of taxes if they sell the stocks themselves and give the cash as a gift.
- Gift taxes incur for any gift given to an individual that’s worth more than $15,000. This also counts against your lifetime exemption.
- Gifting stock to charity is tax deductible. Gifting stocks to individuals is not.
- Always speak with a financial advisor before making any major stock gifting decisions.
Who pays taxes when you give a share of stock as a gift?
Assuming the value of the stock grows before they sell it, the gift receiver pays capital gains taxes on the gift, but not until they decide to sell the shares.
If you give stocks as a gift to your children, they might hold onto those stocks until they graduate college, or potentially even decades down the line until retirement (just imagine the returns!).
If they hold the taxes for more than one year, they’re paying what’s called long-term capital gains taxes. These are lower than short-term capital gains taxes, which are just taxed at the same rate as normal income. However, long-term capital gains taxes are taxed anywhere from 0–20% depending on what tax bracket the recipient is in.
This is true whenever anyone sells a stock, whether or not they received it as a gift.
As a gift giver, you can always cash out on a stock and give the person the cash, including the returns. However, you are responsible for the capital gains taxes in this scenario. Short- and long-term capital gains taxes still apply here.
It really depends on your specific circumstance and preferences whether you want to give the cash or transfer the stocks as is. If you have access to information like the recipient’s tax bracket, it’s beneficial to analyze the monetary (and logistical) pros and cons of both options.
When and how to pay taxes after gifting stocks
When paying taxes after the sale, the gift recipient will need to know three things:
- Cost basis: What price was one stock when you purchased it, and how many stocks did you buy? Your share price X number of stocks purchased = your cost basis.
- Fair market value when gifted: Maybe you purchased the stock on July 1, but didn’t gift the stock until one month later or August 1. The fair market value is the market rate of the stock on August 1. These are placeholder dates, but you get the point.
- Length of time they held the stock: The giver won’t know this when they give the gift, but they can share the date purchased and date gifted for reference. All that really matters is whether it was held for more or less than one year, since that’s the cut-off between short- and long-term capital gains taxes.
This information can usually be found via the brokerage account with which the stocks were initially purchased or placed. However, it’s a good idea to let the recipient know these details, as long as they’re old enough to understand!
How to account for taxes as a gift giver when you buy shares as a gift
If you’re giving the gift, you should know that there’s a limit on how much you can give any one person without having to report it to the IRS. That limit is currently $15,000 for individuals and it includes stock values.
If you exceed this value, you will need to report the value of the gift to the IRS, and it will count against your lifetime exemption as well as incur a gift tax. Currently, the limit for lifetime exemptions is $11.58 million.
This is interesting, because you can give a gift of $14,000 to 9 people at a total value of $126,000 and it won’t count against your lifetime exemption. However, you can give a single gift of $126,000 to one person and 1) you’ll have to pay gift tax on it and 2) it will count against your lifetime exemption.
Married couples have an annual limit of $30,000 before having it count against their lifetime exemption, but they still need to report the gift if it’s over $15,000.
Tax rates for gifts range from 18–40%, depending primarily on the value of the gift beyond the annual exclusion.
Is it different when gifting stock to charity?
Yes—it is different when you give shares of a stock to a “public” charity. Public charities include organizations like churches, hospitals, certain organizations affiliated with hospitals, schools, and colleges.
If you’ve donated the stock to an eligible organization, you can use the market value of the stock at the time of gifting as a tax deduction.
There is a limit to this, however. You can only write off as much as half of your annual adjusted gross income for the year the purchase was made. So if you made $100,000 in 2020 and gifted $55,000 of stocks (which, to be fair, is unlikely), you’d still only be allowed to write off $50,000 due to the limitation on deduction.
Be sure to get a tax receipt from the charity you donate to.
Can the gift giver write off the stock on their taxes even when the recipient isn’t a charity?
Buying shares as a gift for a public charity is considered a donation, but not everyone who receives shares from others is a charity! When you’re just giving a gift to an individual, it’s not tax deductible.
Always speak with a financial advisor before making any major stock gifting decisions.
And one last thing: when gifting stocks as a gift, be sure to opt for automatically reinvesting dividends (not all stocks pay dividends, but you’ll want this automated for those that do). This will compound returns over the long term. When the recipient decides to sell the securities a few months or many years down the line. they’ll have more returns to work with. Yes, this means higher capital gains taxes. But it also means higher earnings. Especially when they hold the stock for more than one year and only have to pay long-term capital gains taxes, it’ll be worth it in the end.