How to Transfer Stock to a Family Member Guide (2024)

Stocks can be a great gift—one we can easily help you with at Bogart Wealth. But before gifting securities (stocks, bonds, and other investments), it’s important to consider the tax implications of the gift.

This guide provides an overview of the tax implications of gifted stock.

Who Pays Capital Gains Tax on Gifted Stock?

You don’t have to pay capital gains tax when you give away stocks. The person who receives the stocks, however, will face capital gains tax if they earn money when they sell the stock.

Capital gains refer to the difference between the value of the stock when it was purchased and when it was sold, but with gifted stocks, the exact calculations can vary depending on the situation.

When the Recipient Sells the Stock at a Gain

Here’s what happens when the recipient sells the stock at a gain. They must use the price you paid when calculating their capital gain.

Say you bought the stock for $1,000, it was worth $2,000 when you gave it to them, and it was worth $4,000 when they sold it. They have a gain of $3,000. That’s the difference in its value from the day you purchased it to the day they sold it.

When the Recipient Sells the Stock at a Loss

You can generally use a capital loss to offset capital gains on your tax return. This is an advantage of a loss, but unfortunately, the loss is limited when it comes from gifted stock. Imagine that you purchase a stock for $4,000, you give it to a relative when it’s worth $2,000, and the relative sells it for $1,000.

They can’t use your purchase price when calculating the loss. They must instead use the fair market value of the stock on the day they received it. This means their loss is $1,000, whereas it would be $3,000 if they could use your basis.

When There Is a Gain and a Loss

Here’s what happens when there’s both a gain and a loss depending on the basis you use. Imagine you purchased a stock for $4,000, and when you gave it to a family member, it was worth $2,000. The recipient sells the stock a few years later for $3,000.

There’s a loss if the recipient uses your purchase price as the basis but a gain if they use the fair market value of the stock on the day they received the gift. The recipient, in this situation, shouldn’t claim a gain or a loss.

Gifting stock can be advantageous in situations where the recipient’s capital gains tax rate is lower than the giver’s rate. You should make sure, however, that the recipient understands that they may incur a tax bill when they sell the stock.

Other Considerations When Gifting Stock to Family

A few additional tax considerations can come into play when you give stock to family members. There are no immediate taxes due when you gift a stock, but you should be aware of the following:

Gift and Estate Tax

You can give any amount of money or property of any value to anyone. There are no limits on the amount you can give away, but there can be long-term tax implications on sizable gifts. You need to file a gift tax return if you give gifts over a certain threshold. The gift threshold is $17,000 as of 2023.

This means that if you give anyone a gift of stock (or anything else) worth more than $17,000, you must file a gift tax return. No tax is due with this return, and the amount you report gets subtracted from your capital gains exemption at the time of your death.

Step-Up Basis on Inherited Gifted Stock

One potential way to save money when you gift stock is to gift it to someone who will leave it to you when they die. This can help to reduce capital gains because when you inherit a stock, you receive a step-up basis. Here’s an example of how that works:

Say you buy a stock position for $5,000 and give it to your parents when it’s worth $10,000. The transfer falls below the gift tax threshold, so wouldn’t trigger a gift tax, and since no shares were sold, there are no capital gains to report.

Then, let’s assume your parents leave the stock to you when they pass, and the stock is now worth $15,000. You wait a few years and sell the position for $17,000. In this scenario, you’d pay capital gains tax on a $2,000 gain—the difference between the price of the position when you inherited it and when you sold it.

If you had simply bought a stock position for $5,000 and waited until it appreciated to $17,000 before selling, your capital gains tax would apply to the full $12,000 gain. It is helpful to contact a wealth management specialist before giving away stocks to avoid confusion and errors.

They can help you understand the current and long-term tax implications for you and the recipient and guide you in exploring advanced strategies to minimize the tax as much as possible.

Reach Out to the Experts to Get Help Today

The experts at Bogart Wealth would love to answer your questions about gifting stock or other wealth management strategies. We encourage our clients to ask tough questions and guide them toward solutions customized to their situation.

We offer financial planning, investment management, tax optimization, and more. Contact Bogart Wealth today to learn more.