Daughter's Liability for LTCG Tax on Sold Shares Gifted by Parent

When it comes to the taxation of gifted shares, the rules can vary significantly depending on the jurisdiction and the specific circumstances. A common question revolves around whether a daughter will be liable to pay the Long-Term Capital Gains (LTCG) tax if gifted shares are sold after a year.

Understanding the Taxation of Gifted Shares

A gift does not impose any tax on the recipient, but upon the sale of those gifted shares, capital gains may arise. The daughter, in this case, will be responsible for any applicable long-term capital gains tax (LTCG) on the sale value of the gifted shares. The key to determining the capital gains is the cost basis of the shares at the time of acquisition by the donor or the original cost to the donor.

Determining the Sale Basis

Upon the sale of the gifted shares, the cost basis for calculating long-term capital gains (LTCG) will be the same cost as the original donor paid for the shares, including the date of acquisition. This basis does not change, regardless of the date of the gift or the date of sale. This means that the daughter will have to use the original cost of the shares when calculating her capital gains and the applicable tax rate.

Comparison with Inheritance

It’s worth noting that the situation for an heir in the United States differs. When inherited shares are sold, the heir is responsible for the long-term capital gains tax. However, they are fortunate to have the cost basis of the inherited stock stepped up to its value on the date of the original owner's death. This can often result in a lower tax liability for the heir.

Taxable Event and Holding Period

The tax liability for the daughter arises from the event of the sale, not the date of the gift. Therefore, the holding period for these shares begins from the date the shares were originally acquired by the donor, and not the date the daughter received them as a gift.

For the daughter to be liable for LTCG tax, she must have held the shares for more than a year before selling. If she sells the shares just one day after they are transferred to her name and the combined holding period of the parent and the inherited shares is more than 12 months, it will be counted towards the long-term capital gains tax.

Conclusion

In summary, if a daughter gifts shares are sold after a year, she will indeed be liable for the long-term capital gains tax. The basis for this calculation will be the original cost of the shares as borne by the original donor, including the date of acquisition. Understanding these rules is crucial for both the donor and the recipient to manage their tax liabilities effectively.

For more detailed information and specific advice, consult with a tax professional familiar with the tax laws of your jurisdiction.