What Is the Cost Basis When Gifting Stock to a Child?

Gifting stock to a child is a common strategy for transferring wealth, but it involves specific tax rules for both the donor and the child. The first step is determining the stock’s cost basis, which is the value used to calculate profit or loss when the stock is eventually sold.

Determining the Child’s Cost Basis

When a child receives stock as a gift, their cost basis is determined by the “carryover basis” rule. This means the child’s cost basis is the same as the donor’s original cost basis, which is what the donor initially paid for the stock, including any commissions or fees. For example, if a parent bought 100 shares of a company at $10 per share for a $1,000 basis, the child’s basis is also $1,000, regardless of the shares’ value on the gift date.

This rule has an exception if the stock’s fair market value (FMV) is lower than the donor’s original cost basis on the gift date. This “dual-basis rule” creates two potential cost basis figures. The basis for calculating a future gain is the donor’s original higher cost basis, while the basis for calculating a future loss is the lower FMV on the date the gift was made.

For example, assume a parent gifts stock with an original cost basis of $10,000, but on the day of the gift, its FMV has dropped to $7,000. If the child later sells the stock for $12,000, they must use the donor’s original $10,000 basis to calculate the gain, resulting in a taxable gain of $2,000. This prevents the donor from transferring a built-in loss to the child.

If the child sells that same stock for $6,000, they must use the lower $7,000 FMV as their basis to calculate the loss, resulting in a deductible capital loss of $1,000. A unique outcome occurs if the stock is sold for a price between the donor’s original basis and the FMV at the time of the gift. If the child sells the stock for any price between $7,000 and $10,000, no gain or loss is recognized.

Tax Implications for the Child Upon Sale

When a child sells gifted stock, the holding period is also a factor in the tax consequences. The donor’s holding period carries over to the child, meaning the child’s ownership is considered to have started when the donor originally purchased the stock. This determines if a gain is short-term (held one year or less) or long-term (held more than one year), which are taxed at different rates.

Capital gains from selling stock are unearned income and may be subject to the “Kiddie Tax.” This tax prevents parents from shifting investment income to children to take advantage of a lower tax bracket. The Kiddie Tax rules apply to children under 18 and dependent full-time students under 24. A portion of the child’s unearned income above a certain threshold is taxed at the parents’ higher marginal tax rate.

For the 2025 tax year, the first $1,350 of a child’s unearned income is tax-free. The next $1,350 is taxed at the child’s own income tax rate. Any unearned income exceeding $2,700 is subject to the Kiddie Tax and is taxed at the parents’ marginal rate. For example, if a child has a $4,000 capital gain, the first $1,350 is not taxed, the next $1,350 is taxed at the child’s rate, and the remaining $1,300 is taxed at the parents’ rate.

Gift Tax Considerations for the Donor

Gifting stock also has tax implications for the donor, separate from the child’s potential capital gains tax. For 2025, a donor can give up to $19,000 worth of assets to any individual without filing a gift tax return. Because this annual gift tax exclusion is per recipient, a donor could give $19,000 each to multiple children in the same year.

If a gift’s value exceeds the annual exclusion, the donor must report it to the IRS, though tax is not automatically due. The excess gift amount is applied against the donor’s lifetime gift and estate tax exemption, which is $13.99 million per individual for 2025. A married couple can combine their exemptions to shield up to $27.98 million from federal estate and gift taxes.

When a gift’s value surpasses the annual exclusion, the donor is required to file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. For example, if a donor gives a child stock worth $50,000 in 2025, the first $19,000 is covered by the annual exclusion. The remaining $31,000 is a taxable gift that must be reported on Form 709 and will reduce the donor’s lifetime exemption.

Required Documentation and Information Transfer

The donor must provide the child with specific records at the time of the gift to ensure accurate tax reporting on a future sale. The donor should provide a written statement with the following information:

• The donor’s original cost basis (the purchase price).
• The original date the stock was purchased.
• The fair market value (FMV) of the stock on the date of the gift.

The child must keep these records indefinitely, as they will be needed to calculate the capital gain or loss when the stock is sold. Without these records, the IRS may assume a cost basis of zero, which would result in a significantly higher tax liability.