Is Selling Gifted Stock Income Taxed in the US?

Understanding the Tax Implications of Selling Gifted Stocks

Have you ever received stocks as a gift and wondered about the tax implications when you decide to sell them? This article delves into the intricacies of selling gifted stocks and how it affects your income tax obligations in the United States.

What is Gifted Stock?

Firstly, it's essential to understand what constitutes gifted stock. Gifted stock refers to shares of a company that you receive as a gift from another individual. This could be from a family member, friend, or any other person. Unlike stocks you purchase yourself, gifted stocks don't have a cost basis, which means the price you paid for them is not considered when calculating your capital gains tax.

Capital Gains Tax on Gifted Stocks

When you sell gifted stocks, the income you earn from the sale is considered a capital gain. However, the tax rate on this gain can vary depending on several factors, including the holding period of the stock and your overall income level.

Long-Term vs. Short-Term Capital Gains

If you hold the gifted stock for more than a year before selling it, the income you earn is classified as a long-term capital gain. The current tax rate for long-term capital gains is 0%, 15%, or 20%, depending on your taxable income.

On the other hand, if you sell the stock within a year of receiving it, the income is considered a short-term capital gain. Short-term capital gains are taxed as ordinary income, which means they are subject to your regular income tax rate.

Determining the Cost Basis

Since gifted stocks don't have a cost basis, the IRS requires you to determine the fair market value of the stock on the date you received the gift. This value becomes your cost basis for calculating your capital gains tax.

Case Study:

Let's say you received 100 shares of XYZ Corporation as a gift from your uncle. The stock was worth 50 per share on the date of the gift. A year later, you decide to sell the stock when it's worth 100 per share.

If you sell the stock after holding it for more than a year, your long-term capital gain would be 5,000 (100 per share x 100 shares). Assuming you fall into the 15% long-term capital gains tax bracket, your tax liability would be 750 (5,000 x 15%).

However, if you sell the stock within a year of receiving it, your short-term capital gain would be 5,000. Assuming you fall into the 22% ordinary income tax bracket, your tax liability would be 1,100 ($5,000 x 22%).

Conclusion

Understanding the tax implications of selling gifted stocks is crucial for anyone who has received stocks as a gift. By knowing the rules and regulations surrounding gifted stocks, you can make informed decisions and minimize your tax obligations. Always consult with a tax professional for personalized advice tailored to your specific situation.

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