Cost basis of gifted stock

[ej401]

A and B, transferred (gifted) 100 shares of stock XYZ in their investment account, to C and D's account in the same brokerage house. At the time of transfer, the FMV of the shares was a lot less than the original cost of the donors. What is C&'s cost basis?
Thanks!

[mwcpa]

C&'s cost of XYZ is confusing...

Using "numbers" makes it easier to see....

If the cost was 100 and the FMV was 50 at the time of the gift.

If C& sell XYZ for 100 or more then the cost of XYZ is 100.

If C& sell XYZ for between 50 and 99 the cost of XYZ is the selling price (no gain or loss)

If C& sell XYZ for under 50, the cost is the FMV at the time of transfer or 50.

www.irs.gov/publications/p550/ch04.html#en_US_2013_publink100010354

"Property Received as a Gift


To figure your basis in property that you received as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value at the time it was given to you, the amount of any gift tax paid on it, and the date it was given to you.

Fair market value less than donor's adjusted basis. If the fair market value of the property at the time of the gift was less than the donor's adjusted basis just before the gift, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Your basis for loss is its fair market value at the time of the gift plus or minus any required adjustments to basis during the period you hold the property.

No gain or loss. If you use the basis for figuring a gain and the result is a loss, and then use the basis for figuring a loss and the result is a gain, you will have neither a gain nor a loss.


Example.

You receive a gift of investment property having an adjusted basis of $10,000 at the time of the gift. The fair market value at the time of the gift is $9,000. You later sell the property for $9,500. You have neither gain nor loss. Your basis for figuring gain is $10,000, and $9,500 minus $10,000 results in a $500 loss. Your basis for figuring loss is $9,000, and $9,500 minus $9,000 results in a $500 gain.

Fair market value equal to or more than donor's adjusted basis. If the fair market value of the property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, your basis for gain or loss on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. Also, you may be allowed to add to the donor's adjusted basis all or part of any gift tax paid, depending on the date of the gift. "

[ej401]

Thanks MW!

“If the cost was 100 and the FMV was 50 at the time of the gift.
If C& sell XYZ for under 50, the cost is the FMV at the time of transfer or 50.”

This means there is no benefit of a deduction for capital loss? Would it have been more prudent for A&B to sell the shares, take a deduction for capital loss, then give the sale proceeds to C&?

[rangerj]

Substantial transactions should be discussed with a tax professional, such as a CPA or Enrolled Agent, PRIOR to entering into the transaction so that it can be planned so the most benefit can be derived for all concerned, except the government. I hate getting the phone call that begins "guess what we just did".

[mwcpa]

Yes ej... You cannot "gift" a tax loss.... 

[rangerj]

Added note: You cannot inherit a tax loss either.

[ej401]

Thanks MW and Ranger. 

Cannot gift or inherit a tax loss - understood.

However, can stocks be gifted to shift capital gains tax from higher tax rate donor to a lower tax rate donee?

[mwcpa]

"However, can stocks be gifted to shift capital gains tax from higher tax rate donor to a lower tax rate donee?"

One of the "costs" of a gift is that any built in capital gain is passed to the donee from the donor.

But, remember, a gift is a gift... you give away the asset.... so shift is a bad word to use here.....

[ej401]

A gift is a gift - gotcha.  Thanks MW.

[rangerj]

Added note:

"SHIFT" is not a common word in tax jargon. A long held tax doctrine provides that you cannot "ASIGN" income, or other tax attributes or benefits. So, you can gift the asset before a gain is realized and the donee can report the gain upon realization (sale or exchange of the asset). Otherwise, you can sell the asset, report the gain, and gift the proceeds. You CANNOT shift the gain if it has been "realized", that is YOU sold the asset at a gain before the gifting of the assets. Again, if the amounts are material a tax professional should be consulted BEFORE the transaction is entered into.