This article introduces some issues that crop up when making gifts of stock. Gift taxes are an orthogonal but closely related issue; see the article elsewhere in the FAQ for more details. Also see the FAQ article on determining the cost basis of securities for notes on computing the basis of shares that were received as a gift.
Occasionally the question crops up from a person who has nice stock gains and would like to give some money to another person. Should the stockholder sell the stock and give cash, or give stock directly? It’s best to seek professional tax advice in this situation. If stock is given, and the recipient needs cash so sells the shares immediately, the recipient only keeps about 80% of the value after paying capital gains tax. In other words, the gift came with a big tax bill. On the other hand, if the stockholder sells some stock in order to give cash (perhaps to stay under the annual exclusion), that pushes up the person’s annual income. If the stockholder has a sufficiently high income, then the stock sale could push that person across various thresholds, one for which itemized deductions begin to be reduced, and the other where personal exemptions begin to be phased out. In addition, higher income could possibly trigger alternate minimum tax (AMT).
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Contributed-By: Art Kamlet, Chris Lott