Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Gifted Stock

What it is:

Gifted stock is stock that one person gives to another person or entity.

How it works (Example):

Let's say John Doe bought 200 shares of Company XYZ a long time ago when it was trading at $1 a share. Over time, the stock has risen and it's now trading at $100 a share. The total position is worth $20,000.

Instead of donating $20,000 of cash, John Doe wants to just donate the stock to an animal shelter. The animal shelter will receive the stock, sell it, and use the $20,000 cash proceeds to fund its operations, as John wishes.

This saves John a ton of money in taxes compared to selling the stock himself and then writing a $20,000 check. For instance, if John sold the shares at $100 a share, he would face a $99 capital gain per share, on which he would have to pay, say, 15% in capital gains taxes. This would cost him $2,970 in taxes.

However, if he donates the stock directly to the animal shelter, he doesn't have to sell the stock and thus doesn't have to incur the capital gains tax for his philanthropy.

If John Doe gifts the stock to his daughter instead of the animal shelter, she becomes responsible for paying capital gains tax on the Company XYZ shares when she eventually sells them, and the tax will be based on John's original basis ($1). This can trigger significant capital gains taxes for John's daughter. She might also have to pay gift taxes on the transfer if John gives her the stock while he's still alive.

Why it Matters:

Gifted stock is a philanthropic way of shifting capital gains without paying taxes on the gains. However, the rules can be very complicated, and what we provide here is a generalization. Consult a tax advisor for details.

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