Question

3. Y received stock as a gift from her father in 2019. Her father purchased the stock several years ago of $30,000. The stock was worth $20,000 at the time the gift was received. Y sold the stock for $18,000 in 2020.

How much gain or loss, if any, should Y report on her 2020 tax return?

Assume the same facts as above, except that Y sold the stock for $25,000. How much gain or loss, if any, should Y report on her 2020 tax return?

Answer 1

Taxation of Gifted stock:

The recipient of shares/stock doesn’t have to worry about gift taxes.

It's when the recipient decides to sell the stock/shares that the issue of valuation comes up—for income taxes. And this is where things can get a bit more complicated.

In general, when valuing a gift of stock for capital gains tax liability, it's the donor's cost basis and holding period that rules.

Theefore,

Holdng period = from the time Y's father was holding the stock = Long term

therefore, capital taxes would apply when the receiver sells the stock/shares.

but. If the stock continues to go down and Receiver decide to sell it, the fair market value on the date we receive the stock and your holding period (which also begins on the date you received it) is used to determine your loss.

here in example.

Case 1 - sells for $ 18,000

cost = $ 20,000 ( on the date we receive the gift, because the stock is falling in price)

Capital Loss = $(18,000 - 20,000) = ($ 2,000)

Case 1 - sells for $ 25,000

If the stock price rises above $ 30,000( the original cost from the donor) then the original cost basis and original holding period transfers over to you.

But since the price has not gone above.

cost = $ 20,000

Capital gain = $ (25,000-20,000) = $ 5,000