Tax Implications When Receiving Money from Stocks Given as a Gift

Understanding the Tax Rules for Gifting Stocks

If you receive cash from stocks given by a friend, you may wonder if you owe any taxes on this gift. In the United States, the specific rules can be quite nuanced, depending on the circumstances.

What Happens When You Receive a Cash Gift from Stocks?

If your friend sells stocks and gives you the resulting cash as a gift, you are not required to pay taxes on the gift. The key point here is the nature of the gift—there was no transaction (such as a sale or service exchange) that would make the gift subject to income tax. Your friend paid the taxes on the sale of the stocks, and the cash transfer to you is a gift.

Gift Taxes and U.S. Law

Gifts of money are generally tax-free in the U.S. However, there are limitations and considerations:

For gifts of cash and other types of gifts totaling less than $18,000 (adjusted for inflation each year) in a single calendar year, the recipient (you) is not required to pay any taxes. This amount is subject to change based on IRS regulations.

If the value of the gift exceeds $18,000 in a single year, the tax liability falls on the giver. However, you can exclude gifts that remain within the exclusion limit.

If you and your spouse are jointly receiving the gift, the exclusion amount per person can be doubled. This means that a single-minded gift totaling up to $36,000 per year can remain tax-free.

For gifts of stocks, the same rules apply. You receive the cash without tax consequences, and the situational tax is typically borne by the giver unless the gift is in exchange for goods or services, at which point it becomes taxable.

What Constitutes a Valid Gift?

When you receive a gift, it should be a bona fide gift. If the transaction involves a quid pro quo (a service or product in exchange for the gift), it would be considered taxable. For example, if your friend gives you $100 and you give them a painting worth $100, the transaction is not a gift in the truest sense, and both parties could be liable for taxes as if it were a sale.

Recipient's Tax Responsibility

In the U.S., the recipient of a gift is not subject to income tax on the gift received. Therefore, if your friend gifts you shares of stock, you generally do not owe tax on the gift itself, only on any dividends you may receive or capital gains realized when you sell the stock.

It's important to note that the giver's tax basis in the stock is transferred to you. So if the giver already paid capital gains tax on the sale of the stock, that reduced tax basis applies to you when you eventually sell the stock. This is important because it can affect your capital gains tax rate.

Key Considerations When Receiving a Gift

If you receive money from stocks given by a friend, ensure it is a gift with no underlying obligations. Any transaction where the stock is given in exchange for a service or product can be taxed as a sale or exchange.

Be aware of the gift exclusion limits. If the value of the gift exceeds these limits, your friend will owe gift tax.

Understand the transfer of the giver's tax basis in the stock. If you sell the stock, you will need to account for the original tax basis before determining your capital gains tax.

Conclusion

When receiving money from stocks given as a gift, you generally do not owe any taxes as long as the transaction adheres to the definition of a genuine gift. Always ensure to understand the full context of the gift and consider consulting a tax professional if the situation is unclear.