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. However, if the stock price rises above $10, then the original cost basis and original holding period transfers over to you.
How does cost basis work for stocks?
Cost basis is the original value of an asset for tax purposes, usually the purchase price, adjusted for stock splits, dividends, and return of capital distributions. This value is used to determine the capital gain, which is equal to the difference between the asset’s cost basis and the current market value.
What is cost basis of gifted stock?
The cost basis of stock you received as a gift (“gifted stock”) is determined by the giver’s original cost basis and the fair market value (FMV) of the stock at the time you received the gift. More than the original basis but less than the FMV at the time of the gift, your selling price becomes the cost basis.
When to use cost basis for stock investment?
There are several issues that come up when numerous investments have been made. The Internal Revenue Service (IRS) says if you can identify the shares that have been sold, their cost basis can be used. For example, if you sell the original 1,000 shares, your cost basis is $10.
How does a stock split affect your cost basis?
How Stock Splits Affect Cost Basis. If the company splits its shares, this will affect your cost basis per share, but not the actual value of the original investment or the current investment. Continuing with the above example, suppose the company issues a 2:1 stock split where one old share gets you two new shares.
How to calculate your cost basis per share?
You can calculate your cost basis per share in two ways: Take the original investment amount ($10,000) and divide it by the new number of shares you hold (2,000 shares) to arrive at the new per-share cost basis ($10,000/2,000 = $5). Take your previous cost basis per share ($10) and divide it by the split factor of 2:1 ($10.00/2 = $5).
Do you have to pay capital gains on cost basis?
With the average cost basis method, the investor must pay a capital gains tax on the gain of $5,670. If the company splits its shares, this will affect your cost basis per share, but not the actual value of the original investment or the current investment.
