Figuring the Cost Basis of a Gift of Stock

My grandmother wants to give me some shares of stock she has owned for a number of years. The stock has increased in value a lot since she originally bought it. If she transfers the shares to me, how do I calculate the cost basis when I sell the stock?

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If the stock has appreciated in value, the basis is the same as your grandmother’s original basis—which is usually the amount she paid for the stock plus any reinvested dividends (plus brokerage commissions). You’re generally taxed on the difference between that and the amount you receive when you sell. Since your grandmother owned the stock for more than a year, you’ll be taxed at long-term capital-gains rates no matter when you sell—even if you end up owning it for less than a year.

Giving you the stock, though, could create a bigger tax bill for you than it would for her, depending on your tax brackets. If your grandmother is retired and in the 10% or 15% income tax bracket, she may qualify to pay 0% in long-term capital gains taxes. (Nearly everyone else pays 15% in long-term capital-gains taxes, and people in the highest, 39.6% bracket pay 20% in capital-gains rates.) If so, your grandmother could sell the shares tax-free and then give you the cash. For more information, see Understanding Capital Gains and Losses.

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You usually pay a lower tax bill if you inherit stock rather than receive it as a gift. In that case, the stock is stepped up in basis to the value when the original owner dies, and nobody pays taxes on the increase in value between when the original owner purchased it and when he or she dies. See Calculating the Cost Basis of Inherited Stock for more information on the rules for a step-up in basis.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.