Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Tuesday, June 28, 2011

Determining the Basis of Gifted and Inherited Stock

Stock-certificate-collection1 Determining capital-gains tax due on gifted or inherited stock shares can be complicated. The basis of an inherited stock share is generally easier to determine than that of a gifted stock share as the basis for inherited stock shares is based on the stock’s value at the time the bequeathing party died. A taxpayer can locate the basis on a tax return of the estate or by researching the stock’s worth at the time of the decedent’s death. If the estate does not provide the stock’s value at the time of death, then the IRS will generally require brokers to determine the stock’s value and report it on Form 1099-B starting next year.

Determining the basis of a gifted stock can be a bit more complicated as it is based on what the original owner paid for the stock, along with any subsequent company changes (e.g. stock splits). In the best case scenario, the gifted stock will come with an original bank statement showing the amount paid for the shares. If the gifted stock does not come with cost-basis information, then the following steps may make locating the stock’s basis a little less troublesome:

  • Review family archives for the original investment statements.
  • Look in a Wall Street Journal dated the same as the year on the stock certificate for the company’s old stock symbol.
  • Keep in mind that stock splits may cause further complications. Look on the internet and company websites for a genealogical tree listing cost basis affecting events.
  • Many CPA firms will research cost basis changes and use software programs to help calculate the adjusted basis for their clients.

Though the IRS has not challenged many taxpayers to date concerning tax basis assertions, challenges may increase once the IRS requires brokers to report cost basis information on Form 1099-B.

The lesson for anyone thinking about making a gift of stock: Give cost-basis information along with it.

Without it, recipients could end up with a lot of detective work to do and a big tax bill if the trail runs cold, especially if they err on the side of caution and pay what they estimate the biggest likely tax bill would be.

Arden Dale, Tips for Solving the Cost-Basis Mystery, The Wall Street Journal, Jun. 20, 2011

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.


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