Dear Tax Talk, 

My uncle has advised me that he plans to transfer $100,000 worth of stock to me soon as a gift so that his own children will be the only ones designated in his will. He is now 85 and I am 64 and on disability. I currently pay no taxes on disability income. How will this affect my tax situation? Will I have to pay taxes on such a gift? Will I be paying the taxes on any capital gains made on these stocks? When, and about how much? You can assume that I'll be in a low tax bracket. Is there a better way to accomplish this gift?

- Terry

Dear Terry, 

When and how much tax you will pay on the gift of stock from your uncle is going to depend on several factors.

Since I do not know any details of his overall estate plan, I am not going to try to answer if there is a better way to accomplish this gift. Instead, let's focus on what happens to you tax-wise once you receive this very generous gift of stock.

When the stock is gifted to you, there is no income tax for you to pay, though you may owe tax on dividends and interest income received subsequently. The calculation for potential capital gains tax will happen if and when you decide to sell it. Your uncle is going to have to let you know what his "adjusted basis" is in the stock, its fair market value on the date of the gift and if he paid any gift tax on the gift. The adjusted basis is generally going to be his cost basis, and the fair market value will be the average of the high and low market price for the stock on the day of the gift.

Now for the challenge of reporting your gain or loss: There are several scenarios that you will need to understand. So hang on for the ride.

If the fair market value of the stock at the time of the gift is less than your uncle's adjusted basis, there is going to be one calculation if you sell the stock at a gain and a different calculation if you sell the stock for a loss. If there is a gain, you will use your uncle's adjusted basis as your basis. If there is a loss, you will use the fair market value on the date of the gift as your basis.

So let's use an example to see how it works.

  • Your uncle bought the stock for $15 per share and it was worth $10 per share on the date of the gift.
  • You end up selling it for $25 per share, so you will have a gain of $10 per share.
  • If the stock is worth only $7 per share when you sell it, then you will have a loss of $3 per share.

But there are different calculations in store for you if the fair market value is equal to or more than your uncle's adjusted basis at the time of the gift. In this situation, your basis is your uncle's adjusted basis at the time of the gift, and you may need to adjust for gift taxes if applicable.

  • For example, let's say your uncle bought the stock for $15 per share and it was worth $25 per share when he gifted it to you.
  • If you then sell it for $25 per share, you will have a gain of $10 per share.
  • If you sell it for $8 per share, you will have a loss of $7 per share.

As far as capital gains treatment goes, it will vary based on whether these stock sales are short term or long term. Your uncle's holding period for the stock will transfer to you. So when you sell, if the amount of time you and your uncle owned it is more than 12 months, then it will be treated as a long-term capital gain or loss. If your combined holding period is less than 12 months, it will be treated as a short-term capital gain or loss. The net gains are taxed at rates varying from 0% to 20%, depending on your marginal tax bracket.

Thanks for the great question and all the best to you.

 

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