What is the cost basis and holding period of gifted stock to a child?

[utah-arizona-taxlady]

I have a client that wants to gift his Vanguard investment stock account to his adult son now while he is still alive.  I am wondering, if the son decides to sell any of the stock, what cost basis does he use and what holding period?  I did some online research and a few well known financial institutions say gifted stock uses the FMV of when the stock was gifted.  Other well known financial institutions say the cost basis is what it was for the original owner.  I found nothing for the holding period. 

[IRonMaN]

Basis would be the parent's basis.  The holding period would start once the stock is signed over to sonny.

[TaxGuyBill · Accepted solution]

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@utah-arizona-taxlady wrote:

 a few well known financial institutions say gifted stock uses the FMV of when the stock was gifted. 

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I would be curious to see those links.

The recipient of the gift is generally also gifted the Basis and the holding period of the property.  However, it depends on the circumstances (FMV may be factored in if it was lower than Basis and sold at a loss).

https://www.irs.gov/publications/p551#en_US_202212_publink1000257001

Gift.

If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. For more information on basis, see Pub. 551.

https://www.irs.gov/publications/p544#en_US_2022_publink100072644

[IRonMaN]

I've never had someone gift and sell right away --------- good to know.

[qbteachmt]

The best thing to do is put the son on the account as beneficiary. When the father passes, this has a full step up in basis to the son. Why put the son in a position of having potentially large tax bills, assuming the father has had these holdings for a while? Why not make it nearly tax free?

If the son needs money, the father can use the gift rules, and sell some stock to fund the gift.

Right now, this initial idea is one of the worst.

[BobKamman]

It's a great idea if the father is in a high tax bracket, plus facing higher Medicare premiums if he takes the capital gain -- and in my experience, many generous parents have money to burn.  And, if the son needs the money, or needs the asset for a margin loan, because he's in a low tax bracket.  

Let's not get hurt jumping to conclusions.  

[pamdory]

That weird FMV lower than basis situation also uses a different holding period.  It's the classic "Heads I win, tails you lose" stance IRS occasionally takes.  @TaxGuyBill link gives a good example.  

[pamdory]

I live in a state with a $1M threshold for estate tax but no gift tax.  The child would rather pay capital gains rates than estate tax.  And they would have the option of selling when they want to.  

There are good reasons to make lifetime gifts as well as leaving assets to be inherited with a step-up.  It depends on the situation, as always.

[utah-arizona-taxlady]

Thank you to all of you!  I figured it was the cost basis of the father and the same holding period.  The father says he just doesn't want to deal with it anymore, he is old and just lost his wife who did all the paperwork and finances.  Trying to get his taxes done this year was a nightmare.  I usually work with her.  They are in a different state and he doesn't text or email.  What a fiasco...well enough of my problems.  I told him it would be best to leave it alone and let his son inherit it but I thought I better double check my instincts. 

BTW...the link I saw that I can remember that showed the cost stepped up basis for a gift was Charles Schwab.  But to be honest, I didn't open it, only read what was showing on the Google search so maybe it was leading me astray! 

Thanks again, you guys are the BEST!!!!   11 more days!  yay!  My neck hurts this year, I'm getting too old for these long days at my desk.  😕 

[qbteachmt]

"I live in a state with a $1M threshold for estate tax but no gift tax."

Oh, wow. Around here, that would barely get you a bungalow. Thanks, Yellowstone TV show.

[BobKamman]

Was the wife also an owner of the stock?  Did they move to a community-property state?