Gifting stock and cash may seem alike, but they are taxed differently. When you gift appreciated stock, you transfer the shares instead of selling them first. The person receiving the stock also receives your original cost basis. If they later sell the shares, they pay taxes on the gain from that original amount.
This can be beneficial because the recipient may be in a lower tax bracket. For example, a child or grandchild with lower income may pay less capital gains tax or even qualify for a 0% capital gains tax rate.
For example, if you purchased stock for $10,000 and it is now worth $50,000, selling the stock yourself would create taxes on the $40,000 gain. However, if these shares are gifted the tax liability may be shifted as well.
Gifting the shares instead allows the recipient to decide when to sell and may result in a lower tax bill.
However, gifting is not always the best option. When appreciated stock is inherited, the cost basis can be stepped up to the stock’s value at the owner’s death. This can reduce capital gains taxes for heirs.
Gifting appreciated stock can be a useful strategy when you want to help family members, teach younger generations about investing, move future growth out of your estate, or support charities in a tax-efficient way.
Before deciding to gift shares instead of cash, it is important to consider the income tax implications, how it fits within an estate plan, and the recipient’s financial situation.