Can You Gift Appreciated Securities? Steps and Tax Implications

Gifting appreciated securities, such as stocks or mutual funds, can be a tax-efficient way to transfer wealth. Instead of selling the asset and incurring capital gains taxes, you may be able to pass it on while potentially reducing your overall tax liability. This strategy is commonly used for charitable donations and family gifting.

Steps to Transfer Securities

To transfer appreciated securities, the donor must coordinate with the recipient and their financial institutions. First, confirm that the brokerage or institution holding the securities allows direct transfers. Most firms facilitate this process through a transfer request form, which requires account numbers, details of the securities being gifted, and the number of shares. Some institutions may also require a medallion signature guarantee to verify the account holder’s identity.

Once the request is submitted, the brokerage moves the securities from the donor’s account to the recipient’s. This process can take several days, depending on the institution’s policies and whether the recipient has an account with the same firm. If the recipient lacks an account, they may need to open one before the transfer can proceed.

For securities held in certificate form rather than electronically, additional steps may be required, such as endorsing the certificates and mailing them to the receiving institution.

Determining Fair Market Value

Fair market value (FMV) determines both the donor’s gift amount and the recipient’s cost basis. For publicly traded securities, the IRS calculates FMV using the average of the highest and lowest selling prices on the transfer date. For example, if a stock trades between $50 and $55, the FMV would be $52.50 per share.

Valuing non-publicly traded securities is more complex. Closely held stocks, restricted shares, or private company equity may require a professional appraisal. The IRS scrutinizes these valuations, and improper assessments can lead to penalties. Revenue Ruling 59-60 outlines factors to consider, including financial statements, earning potential, and market conditions.

If gifts to a single recipient exceed the annual exclusion limit—$18,000 in 2024—the excess may count toward the donor’s lifetime exemption, currently $13.61 million. For charitable contributions, donors can typically deduct the full FMV of publicly traded securities held for over a year when given to qualified organizations.

Gift Tax and Filing Rules

The IRS imposes gift tax rules to prevent individuals from avoiding estate taxes by transferring wealth during their lifetime. In 2024, the annual exclusion allows gifts up to $18,000 per recipient without requiring a gift tax return. Spouses can combine their exclusions, allowing a married couple to jointly gift up to $36,000 to an individual without tax consequences.

If the value of gifted securities exceeds the exclusion limit, the donor must file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This form tracks gifts exceeding the annual threshold and applies any excess against the donor’s lifetime exemption. Filing does not necessarily mean taxes are owed but records the reduction of the lifetime exemption. Only when cumulative taxable gifts exceed the exemption does the donor face actual gift tax liability, which can reach 40%.

Transfers to U.S. citizen spouses are exempt from gift tax due to the unlimited marital deduction. However, gifts to non-citizen spouses are subject to a separate limit, set at $185,000 for 2024. Donations to qualifying charities are not considered taxable gifts, allowing donors to transfer appreciated securities without affecting their exclusion or exemption amounts.

Capital Gains Considerations

The recipient of gifted securities assumes the donor’s original purchase price, known as the cost basis, which determines future capital gains tax liability. If the securities have appreciated, the difference between the original purchase price and the sale price will be subject to capital gains tax when the recipient sells. The holding period is also transferred, meaning if the donor held the asset for more than a year, the recipient benefits from long-term capital gains rates, which are lower than short-term rates. In 2024, long-term capital gains tax rates range from 0% to 20%, depending on the recipient’s taxable income.

If the securities have lost value since the original purchase, capital loss rules apply. When the FMV at the time of the gift is lower than the donor’s cost basis, the recipient’s basis depends on the eventual sale price. If the asset is sold for more than the donor’s basis, the original cost applies. If it is sold for less than the FMV at the time of the gift, the lower FMV becomes the basis. Any sale between these two values results in no gain or loss for tax purposes.

Documentation and Recordkeeping

Proper documentation ensures compliance with tax regulations and substantiates the transaction in case of an audit. Both the donor and recipient should maintain records, including transfer confirmations, brokerage statements, and any correspondence related to the gift. These documents establish the FMV on the transfer date and confirm the original cost basis, which is essential for calculating future capital gains taxes.

If a gift tax return is required, the donor should retain copies of Form 709 and any supporting documentation, such as appraisals for non-publicly traded securities. Charitable contributions of securities valued at more than $500 require filing Form 8283, and donations exceeding $5,000 may necessitate a qualified appraisal. Recipients should also keep records of the original purchase price and holding period, as brokerages do not always track transferred cost basis automatically.