17 Oct Figuring cost basis for gifted stock

Q. When I give stocks to my grandson, what does he start with for a cost basis: the price of it when I give it to him or the price when I purchased it?
— Grandpa

A. Cost basis can be very complicated, and when it comes to a gift, well, yes, it’s complicated.

Your grandson’s cost basis is equal to the price you paid for the stock if he sells the stock for more than you paid for it, said Howard Hook, certified financial planner and certified public accountant with EKS Associates in Princeton.

For example, if you paid $25 per share and he sells it for $30 per share, he will realize a $5 per share taxable gain.

The math is different if your grandson sells the stock for less than the stock was worth when he received the stock from you.

In that case, his loss is capped at the difference between the selling price and the fair market value of the stock at the date you gifted him the stock, Hook said.

He offered an example with hypothetical stock you gift to your grandson. The stock cost you $25 per share, and on the date of gift, the fair market value was $20 per share. If your grandson sells the stock at $15 per share, he will realize a loss equal to $5 per share.

Finally, if your grandson sells the stock at a price between the fair market value on the date you gave him the stock and your cost basis then there is no gain or loss realized on the sale, Hook said. Take the same example from above except your grandson sells the stock for $23 per share. Then, he would not have any gain or loss on the sale.

“The reason the rules are setup like this are to try to avoid shifting a tax loss to a taxpayer in a higher tax bracket,” Hook said.

Many times, Hook said, a stock gifted to children or grandchildren has been owned for so long before it was gifted that the loss rules above do not come into play.

“However, when they do, people can get tripped up if they don’t know how to apply the right cost basis to them,” Hook said.

As a side note, make sure you’re away of how any gift could impact your grandson’s financial aid application.

Also consider the differences when you gift stock versus if your grandson inherits it.

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This post was first published in October 2016.