Figuring out your cost basis:
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If you sell the shares for a gain, use the donor's cost basis and purchase date as your cost basis and purchase/acquisition date to characterize your realized capital gain. In other words, if your donor bought the gifted stock over a year ago from the time you sell the stock, it can be considered a long-term gain - maximum of 15% tax rate.
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If you sell the shares for a loss, your cost basis Cost basis is the original amount paid for a security that has been adjusted for wash sales and corporate actions. Cost basis is used to determine capital gains and losses is the lower of: (1) the donor's basis or (2) the Fair Market Value (FMV) as of the transfer date. Your purchase/acquisition date will be the donor's purchase date in case (1) or the transfer date in case (2). We can thank Congress for this rule; they feel people should be prevented from giving away a loss.
Note:If the donor paid a gift tax on shares given to you with a value over $11,000, you should adjust the cost basis determined above. In the simplest case, adjust it upward by the amount equal to the gift tax. Specifically, the gift tax amount attributable to the stock appreciation before the date of the gift.
Tax Point:
Lower tax rates on capital gains means that you can diversify the family portfolio by selling highly appreciated assets with a big capital gains tax bite. Deciding whether to make a gift to a child during the parent's lifetime or whether the asset should transfer to the child at the parent's death may be less troublesome now that the capital gains rate has taken a dip.
