Gifting Stock and Inherited Stock: Tax Rules for Transfers

Gifting Stock: How It Works

Under US federal tax law, giving shares of stock to another person is a gift— a transfer of property for less than full and adequate consideration. Unlike a sale, the act of gifting stock does not trigger a taxable gain for the donor in the year the gift is made, nor does the recipient owe income tax simply for receiving the shares. However, several important tax consequences do follow the transfer, making it critical to understand the rules before proceeding.

Gifts of stock are subject to the federal gift tax, a transfer tax administered by the IRS that applies when a taxpayer gives property to another person. However, two key exemptions — the annual exclusion and the lifetime exemption — mean that the vast majority of stock gifts never result in an actual tax payment.

The tax rules that govern gifted stock relate primarily to cost basis. For a broader foundation on how capital gains taxes work, see our article on Capital Gains Tax on Stocks. Definitions of key terms like basis, holding period, and fair market value are available in our Investment & Tax Glossary.

Donor's Cost Basis Carries Over

When you receive stock as a gift, you generally take on the donor's original cost basis— this is known as a carryover basis or transferred basis. You do not get a fresh basis equal to the value of the stock on the day you received it; instead, you step into the donor's tax shoes. When you eventually sell the shares, your capital gain or loss is calculated using the donor's original purchase price, not the value at the time you received the gift.

The holding periodalso transfers with the gift. If the donor held the stock for more than one year at the time of the gift, the recipient's holding period begins on the donor's original purchase date. This means the recipient immediately qualifies for long-term capital gains treatment (the preferential 0%, 15%, or 20% rates) if they sell right away — as long as the stock was already long-term in the donor's hands.

There is an important exception when the gift is of depreciated stock(stock worth less than the donor's basis at the time of the gift). In that case, special dual-basis rules apply: the recipient uses the donor's basis to compute a gain, but uses the lower fair market value at the time of the gift to compute a loss. If the eventual sale price falls between the two figures, there is neither a gain nor a loss. See the section on gifting depreciated stock below for more detail.

Annual Gift Tax Exclusion ($19,000 for 2025)

The IRS allows every individual to give up to a certain amount to any number of recipients each year without triggering any gift tax reporting obligations or reducing their lifetime exemption. This is called the annual gift tax exclusion. For the 2025 tax year, the annual exclusion is $19,000 per recipient.

The annual exclusion is per-donor and per-recipient. A married couple can combine their exclusions through a process called gift splitting (which requires consent on Form 709) to give up to $38,000 per recipient per year from the couple as a unit, even if only one spouse directly owns the assets being gifted.

The annual exclusion amount is indexed to inflation in $1,000 increments. It was $18,000 in 2024 and increased to $19,000 in 2025. Gifts that exceed the annual exclusion in any year are called taxable gifts— but this does not necessarily mean you owe gift tax in that year. Instead, the excess amount reduces your available lifetime exemption.

The annual exclusion resets each calendar year and cannot be carried forward. A gift of stock is generally valued at its fair market value on the date of the transfer for gift tax purposes.

Lifetime Gift and Estate Tax Exemption

In addition to the annual exclusion, each US individual has a lifetime gift and estate tax exemption— a cumulative amount of wealth that can be transferred, during life or at death, free of federal gift and estate tax. For 2025, the lifetime exemption is $13.99 million per individual ($27.98 million for a married couple). This exemption is unified, meaning gifts made during your lifetime and assets transferred at death share the same pool.

Gifts that exceed the annual exclusion in any year are reported on Form 709 and reduce your remaining lifetime exemption dollar for dollar. You do not owe any out-of-pocket gift tax until you have exhausted your entire lifetime exemption.

Gifts that do not qualify for the annual exclusion, such as gifts of future interests, must generally be reported regardless of amount. Certain transfers — such as direct payments of tuition to educational institutions or medical expenses paid directly to medical providers — are completely exempt from gift tax and do not consume the annual exclusion or lifetime exemption.

Gifts between US citizen spouses are generally eligible for an unlimited marital deduction and are not subject to gift tax. Different rules apply for gifts to non-citizen spouses.

How to Gift Stock (Broker Transfer)

Transferring shares of stock as a gift is typically done directly through a brokerage account rather than by writing a check or withdrawing cash. The general process works as follows:

1. Recipient opens a brokerage account— The person receiving the gift must have an account at a brokerage that can receive the transferred shares. They do not need to be at the same broker as the donor.
2. Donor contacts their broker— The donor notifies their brokerage of the intended gift transfer. Most brokers have a form specifically for this purpose, sometimes called a Gift of Securities form or a Direct Registration transfer request.
3. Recipient provides their account information — The recipient's brokerage account number, brokerage name, and DTC (Depository Trust Company) participant number are needed to route the transfer.
4. Broker processes the transfer— The shares are moved from the donor's account to the recipient's account in kind — as shares, not cash. The donor does not sell the shares; they are transferred directly. Processing typically takes one to five business days depending on the brokers involved.
5. Basis documentation is passed along— The donor should provide written documentation of the original cost basis and acquisition date so the recipient can properly report any future gain or loss.

Gifting Appreciated vs. Depreciated Stock

Gifting Appreciated Stock

Gifting stock that has risen in value since purchase can be an effective strategy for transferring wealth to family members in lower tax brackets. Because the capital gain is not triggered at the time of the gift (the donor does not sell), no immediate tax is owed. When the recipient eventually sells, they pay capital gains tax at their own rate on the accumulated gain — which may be significantly lower than the donor's rate.

Note that this strategy is less effective when the recipient is a minor whose investment income may be subject to the kiddie tax, which taxes the child's unearned income above a threshold at the parent's rate. Consult a qualified tax professional before implementing this strategy.

Gifting Depreciated Stock: Why You Should Generally Avoid It

Gifting stock that has fallen in value below your cost basis (a loss position) is generally tax-inefficient. Because of the dual-basis rules for gifts of depreciated property, the recipient cannot use the donor's higher basis to generate a capital loss when they sell. Instead:

• If the recipient sells for more than the donor's original basis, they have a capital gain.
• If the recipient sells for less than the fair market value at the time of the gift, they have a capital loss (using the FMV at gift date as the loss basis, not the higher original cost).
• If the recipient sells for a price between the FMV at gift and the donor's original basis, the result is no gain and no loss.

The practical implication: by gifting depreciated stock, the donor permanently loses the ability to recognize the capital loss. A better approach is for the donor to sell the stock first (realizing the loss on their own return), and then gift the cash proceeds to the recipient.

Inherited Stock and Stepped-Up Basis

The tax treatment of inherited stock differs fundamentally from gifted stock. When someone dies, their estate generally transfers assets to heirs with a stepped-up basis— a new cost basis equal to the fair market value of the asset on the date of the decedent's death (or an alternate valuation date if elected by the estate). This is one of the most significant tax planning concepts in US law.

Step-Up in Basis Explained

The step-up in basis means that all capital appreciation that accrued during the decedent's lifetime permanently escapes capital gains tax. The heir's taxable gain, if they later sell, is calculated only from the stepped-up value going forward — not from the original purchase price decades earlier.

In rare cases where an asset has declined in value, the basis is actually stepped down to the date-of-death fair market value rather than stepped up. The estate may also elect an alternate valuation date (six months after death) if the estate qualifies and doing so reduces the estate tax burden; this election affects the basis of all estate assets, not just selected ones.

The stepped-up basis rule has been subject to various legislative proposals to modify or repeal it over the years. As of the 2025 tax year, it remains in effect under current law. Consult a qualified estate planning attorney for guidance on how these rules apply to a specific estate.

Community Property: The Double Step-Up

Married couples who live in one of the nine community property states may be eligible for an especially valuable tax benefit known as the double step-up in basis. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska allows couples to opt in to community property treatment.

In these states, most property acquired during the marriage is considered owned equally (50/50) by both spouses as community property. When one spouse dies, both halvesof community property typically receive a step-up in basis to fair market value — not just the deceased spouse's half. This is the double step-up.

The double step-up can be a powerful reason for some married couples to ensure their appreciated assets are properly characterized as community property. However, community property rules are complex, vary by state, and require careful estate planning to implement correctly. Consult a qualified estate planning attorney in your state.

Gifting Stock to Charity: Avoid Capital Gains and Get a Deduction

Donating appreciated stock directly to a qualified charitable organization is widely regarded as one of the most tax-efficient forms of charitable giving available to US investors. Compared to selling the stock and donating cash, giving shares directly can provide a two-part tax benefit:

• No capital gains tax:When you transfer appreciated stock directly to a qualified charity, you do not recognize the capital gain. The gain that accrued while you owned the shares is never taxed — for either you or the charity (which is tax-exempt).
• Charitable deduction: You can generally deduct the full fair market value of the stock on the date of the contribution as a charitable deduction on Schedule A of your federal income tax return, subject to AGI limitations (generally 30% of adjusted gross income for appreciated capital gain property donated to public charities; excess deductions can be carried forward up to five years).

This strategy works best for stock held for more than one year (so the full fair market value is deductible rather than just the cost basis, which applies to short-term property donated to charity). Always verify that the recipient organization qualifies as a 501(c)(3) public charity or qualifying organization under IRS rules.

Donating stock worth more than $500 requires filing Form 8283 with your tax return. Donations of stock worth more than $5,000 typically require a qualified appraisal for non-publicly-traded securities, though publicly traded stock does not require an appraisal.

Donor-Advised Funds (DAFs)

A Donor-Advised Fund (DAF)is a charitable giving account sponsored by a public charity — often affiliated with a brokerage firm such as Fidelity Charitable, Vanguard Charitable, or Schwab Charitable — into which a donor can contribute assets (including appreciated stock), receive an immediate charitable deduction, and then recommend grants to specific charities over time at their own pace.

The key tax features of a DAF are:

• Immediate deduction: The charitable deduction is taken in the year you contribute to the DAF, even if the funds are not distributed to end charities for months or years.
• No capital gains on contribution: Like a direct charitable donation, contributing appreciated long-term stock to a DAF avoids capital gains tax entirely.
• Tax-free growth: Assets inside the DAF can be invested and grow tax-free until distributed to charities.
• Flexibility: You can contribute a large amount in a high-income year to front-load deductions and then recommend grants at a comfortable pace over subsequent years.

DAFs have a deduction limit of 60% of AGI for cash contributions and 30% of AGI for appreciated capital gain property. Unused deductions carry forward up to five years.

One consideration: once assets are contributed to a DAF, the contribution is irrevocable. The donor can only recommend (not direct) grants; the sponsoring organization retains legal control. In practice, sponsoring organizations almost always follow donor recommendations, but the donor relinquishes legal ownership of the assets.

Qualified Charitable Distributions (QCDs) from IRAs

For investors aged 70½ or older who own a traditional IRA, a Qualified Charitable Distribution (QCD)is a specialized and highly tax-efficient way to give to charity directly from the IRA. Under IRS rules, individuals aged 70½ or older can transfer up to $108,000 per year (2025 limit, indexed to inflation) directly from their traditional IRA to a qualified public charity.

The tax benefits are significant:

• Excluded from gross income: A QCD is not counted as taxable income. A traditional IRA distribution is ordinarily taxable as ordinary income, but a QCD bypasses that entirely.
• Counts toward Required Minimum Distribution:For taxpayers subject to Required Minimum Distributions (RMDs) — mandatory annual withdrawals from traditional IRAs beginning at age 73 — a QCD can satisfy all or part of the RMD for the year, reducing taxable income.
• No need to itemize: Because the QCD amount is never included in income (rather than being included and then deducted), even taxpayers who take the standard deduction receive the full tax benefit.

QCDs must be made directly from the IRA custodian to the charity — the check must be made payable to the charity, not to the IRA owner. Donor-Advised Funds and private foundations do not qualify as recipients of QCDs under current IRS rules.

Gift Tax Reporting: Form 709

When you make a taxable gift — a gift that exceeds the annual exclusion amount for a given recipient in a given year — you are generally required to report it on IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This form is filed separately from your regular income tax return (Form 1040).

Key Form 709 rules include:

• Due date: Form 709 is due on April 15 of the year following the year of the gift (the same deadline as Form 1040). Extensions are available; filing Form 4868 for your income tax return also extends the Form 709 deadline automatically.
• Who files: The donor (the person making the gift) is responsible for filing Form 709. The recipient does not file anything.
• Gifts to report: All taxable gifts must be reported, regardless of whether any gift tax is owed. Gifts to qualified charities are generally excluded and not reported.
• Cumulative tracking: Form 709 tracks your total lifetime taxable gifts (beyond the annual exclusion) to reconcile against your lifetime exemption. This creates a running record with the IRS across all years.
• Gift splitting: Married couples electing to split gifts must both sign Form 709 even if only one spouse made the gift.

Frequently Asked Questions