What Happens When You Gift Stock?

Gifting stock involves transferring ownership of shares from one individual to another, or to an organization, without receiving equivalent value in return. This practice serves various purposes, from providing financial support to family members and friends to making philanthropic contributions to charitable causes. It can be a strategic way to transfer wealth, potentially offering benefits that differ from gifting cash or other assets. Understanding the mechanics and tax considerations associated with such transfers is important for both the giver and the receiver.

Tax Implications for the Giver

Individuals who gift stock must understand specific tax rules that apply to the transfer. A primary consideration is the annual gift tax exclusion, outlined in Internal Revenue Code (IRC) Section 2503. For the 2025 tax year, an individual can gift up to $19,000 to any number of recipients without triggering gift tax or reporting requirements. If a married couple chooses to split gifts, they can collectively gift up to $38,000 per recipient in 2025.

Should a gift to an individual exceed the annual exclusion amount, the donor must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This form reports the gift to the IRS, even if no gift tax is immediately due. Information reported on Form 709 includes identification details for both parties, a description of the gifted stock, its fair market value on the gift date, and the gift date itself.

Any amount gifted above the annual exclusion reduces the donor’s lifetime gift tax exemption. This exemption, codified in IRC Section 2505, allows individuals to transfer a substantial amount of wealth over their lifetime or at death without incurring federal gift or estate tax. For 2025, the lifetime gift tax exemption is $13.99 million for individuals, effectively doubling to $27.98 million for married couples. While gifts exceeding the annual exclusion must be reported, actual gift tax is only paid once cumulative taxable gifts exceed this lifetime exemption.

The donor does not incur income tax or capital gains tax on the act of gifting the stock itself. The gift tax, if due, is the responsibility of the donor, not the recipient. This distinction places the reporting and payment burden on the donor.

Tax Implications for the Receiver

For the individual receiving gifted stock, the tax implications differ from those of the giver. The donee does not pay income tax upon receiving gifted stock. Gifts, regardless of their form, are not considered taxable income for the recipient in most circumstances.

The donee’s cost basis in gifted stock impacts future capital gains or losses when the stock is sold. Under IRC Section 1015, known as the “carryover basis” rule, the donee’s basis is the same as the donor’s original adjusted basis. This means that if the donor purchased stock for $50 per share and later gifted it when its market value was $100 per share, the donee’s basis for calculating gain upon sale would still be $50 per share.

An exception applies when the stock’s fair market value (FMV) on the gift date is lower than the donor’s basis. For determining a loss, the donee’s basis becomes the FMV on the gift date. For example, if the donor’s basis was $50, but the stock’s FMV on the gift date was $40, and the donee later sells it for $30, the loss would be calculated using the $40 FMV, resulting in a $10 loss. If the donee sells the stock for a price between the donor’s basis and the lower FMV at the time of the gift, no gain or loss is recognized.

The holding period for the donee includes the donor’s holding period. This determines whether future capital gains upon sale are short-term or long-term, affecting applicable capital gains tax rates. Long-term capital gains, from assets held over one year, qualify for lower tax rates than short-term gains.

Process of Gifting Stock

Transferring stock involves specific steps to ensure ownership change and record-keeping. Brokerage firms are the most common method for gifting stock. Both donor and donee need brokerage accounts for this transfer.

The donor initiates the process by contacting their brokerage firm and providing the donee’s account details, including name, Social Security number, and brokerage account number. The donor must also specify the exact stock and quantity of shares. Most brokerage firms require specific transfer forms or instructions, often completed online, though some may require a physical signature. Transfers between accounts at the same brokerage are quicker, often completed within a week, while transfers between different firms may take a few weeks.

For stock held as physical certificates, the process is more traditional. The donor must endorse the stock certificate by signing it, often requiring a medallion signature guarantee from a financial institution. This guarantee verifies signature authenticity and prevents fraudulent transfers. After endorsement, the certificate is sent to the company’s transfer agent for re-registration into the donee’s name. While physical certificates can be gifted, electronic transfers through brokerage accounts are more common and efficient.

Accurately determining the fair market value (FMV) of the stock on the date of the gift is important for the donor’s tax reporting. For publicly traded securities, the FMV is calculated as the mean between the highest and lowest selling prices on the gift date. If there were no sales on the gift date, a weighted average of sales on nearby dates may be used. Maintaining thorough records of the gift, including the transfer date, the stock’s FMV on that date, and the donee’s identifying information, is important for both parties for tax purposes.