Do you have stocks that you want to gift to a child or loved one? You can do this in many different ways, but you should also have awareness of the tax implications as well.
Gifts that exceed $15,000 in appreciated value fall subject to gift taxes and the person receiving the gift may eventually pay taxes on the gift as well.
In this blog post we will discuss tips from a tax pro (that’s me — I’m a licensed CPA) regarding how to gift stock without incurring these penalties or at least managing the tax impact that makes the most sense for everyone.
- 1 Can You Gift Stock to Someone?
- 2 Can You Gift Someone Shares of Stock Directly?
- 3 Do You Pay Taxes When Giving Stock as a Gift?
- 4 What are the Possible Tax Implications of Gifting Stock for You?
- 5 What Should I Consider When Thinking About Gifting Stock?
- 6 Does the Stock Gift Recipient Pay Taxes?
- 7 How to Gift Stock for a Child in a Brokerage Account
- 8 How Do I Transfer Shares as a Gift?
- 9 Great Stocking Stuffers (Custodial Brokerages) for Kids
- 10 Stocking Stuffer Brokerages (and Year Round Gifts) for Adults
- 11 Can I Gift Shares to My Child or Family Member?
- 12 How Does the IRS Know if I Give Stock?
- 13 What is the Lifetime Gift Tax Exclusion?
- 14 Can You Gift Appreciated Stock to a 529 Plan?
Can You Gift Stock to Someone?
When it comes to giving stock, both you and the recipient may face capital gains taxes. Because of this, you should factor these into the decision of whether you gift stock or how much you gift at a time.
Usually, gift taxes don’t crop up as an issue for most givers because they fall below the $15,000 annual limit per person per year (married couples who file taxes jointly can give up to $30,000 per year per child, grandchild or other loved one).
For example, grandparents with five grandkids can give up to $150,000 in gifted stock and cash (or other assets considered as the best investments to own) per year ($30,000 per grandchild) without needing to pay gift taxes.
Certainly a high bar to exceed and reason why gift taxes rarely become an issue for the vast majority of people looking to gift stock to someone.
One way around this gift tax involves setting up a trust. You have several examples like Irrevocable Life Insurance Trusts (ILIT) where you can transfer wealth in a tax-smart way through a life insurance policy.
Be mindful of rules like a three-year lookback period or the federal estate taxes ($11.7 million of assets get exempted in 2021) that come into play.
Likewise, you can use other types of trusts to donate appreciated stock that hopefully continues its past behavior and results in a positive future performance. Though, as with all stocks, past results are no guarantee of future performance.
In short, yes. You don’t need to sell the stock before gifting shares of stock. Gifting stocks directly to someone, however, involves several issues you’ll need to have more knowledge about before making the transfer from your account to the beneficiary’s account.
First, you’ll need to contemplate capital gains taxes, or those taxes you pay when you buy and sell stocks for a level of proceeds which differ from your cost basis.
Second, you’ll need to navigate gift tax rules. As noted above, for most individuals, this won’t pose a problem so long as the annual amount of gifted stock falls below $15,000 per person (or $30,000 per married couple filing jointly).
Third, you should consider financial control. That means ceding control of the gifted stock to the recipient, who, in most cases, can then do most anything they want with the stocks you give.
You can attach limitations to this through use of trusts, but simply gifting a stock portfolio or even individual investment from your financial institution to their account will not place limitations on how they use the funds.
This article speaks to these issues at a high level and I’d recommend seeking specialized help from a financial advisor, tax professional or even estate planning attorney before proceeding with a gift if you have a unique financial situation which requires more individualized assistance.
Do You Pay Taxes When Giving Stock as a Gift?
Fun question with an even more fun answer: it depends! Ah, the favorite response of any financial professional.
Though, as noted above, more likely than not, you won’t pay taxes when giving stock as a gift. At least so long as you keep your stock gifts below the annual gifting thresholds.
For a more in-depth discussion of the possible taxes you pay for gifting stock, let’s take a look at the two types of taxes you’ll need to consider before transferring a stock certificate (digitally) from your brokerage firm to kids, grandkids or other loved ones.
→ Gift Taxes
Gift taxes are an issue when you make gifts of cash or property that exceed the annual limits.
Thankfully, for most people (married couples excluded), gifting digital shares isn’t considered a taxable gift so long as your total yearly giving doesn’t reach certain thresholds ($15,000 per person per year, or $30,000 per married couple per year) and it’s not done in excess of these same thresholds on an ongoing basis without sufficient consideration.
For example, parents who wish to gift stock to their kids can donate $20,000 to their daughter or son without any taxable consequence. Because both parents can give up to $15,000 per year tax-free, the gift tax doesn’t play a role in this stock transfer.
→ Capital Gains Taxes
Capital gains taxes are a major consideration for those who are considering gifting stock, and it’s important to understand the difference between short-term capital gains taxes and long-term capital gains taxes when deciding on a strategy.
When you purchase a capital asset – whether that includes a stock, bond, house, cryptocurrency, or other investment – you establish a basis equal to your cost to acquire it. When you sell the stock or other asset, you compare the proceeds from the sale to the basis.
From here, you can determine whether you have a capital loss or a capital gain. If your proceeds exceed your basis, you have a capital gain. If reversed, you have a capital loss.
The type of capital gains you pay gets determined by the holding period of an asset, not its price.
You’ll also need to consider the time period for which you held the asset. Your gains or losses will classify as either “short-term” or “long-term.” How long you hold a stock plays a big role in how much you have to pay in capital gains taxes.
- Short-Term Capital Gains and Losses. When you buy and sell the same asset within a single year, you recognize a short-term capital gain or loss. Short-term gains fall subject to the same tax rates you pay on ordinary income, such as wages and salaries. The IRS has seven tax brackets for ordinary income ranging from as low as 10% to as high as 37%.
- Long-Term Capital Gains and Losses. When you buy an asset and sell the same asset after holding it for at least a year, the difference between the sales proceeds and your cost basis becomes a long-term capital gain or loss. Typically, you’ll pay less tax on a long-term gain than on a short-term gain because the rates are generally lower. Currently, taxpayers face three tax rates for long-term capital gains – 0%, 15%, and 20%. Which rate you pay depends on your income.
Depending on your level of income, you may also pay the 3.8% Net Investment Income (NII) tax.
The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have investment income above certain thresholds. Therefore, you can pay up to 40.8% (37% + 3.8%) on your short-term capital gains.
Likewise, you can pay rates up to 23.8% on long-term capital gains with the inclusion of the NIIT.
What are the Possible Tax Implications of Gifting Stock for You?
If the stock has appreciated in value and you choose to sell it to transfer cash instead of stock, you’ll likely encounter capital gains taxes.
In this case, you’d be better off simply giving her the stock directly to avoid paying any taxes, trading fees or any other cost of ownership related to investing.
On the other hand, if the stock has gone down in value, you might think about selling it to recognize a capital loss and transferring cash to her instead. This gives her money for her personal use while locking in a capital loss for yourself.
What Should I Consider When Thinking About Gifting Stock?
When considering the annual $15,000 value, know this is the exempt amount. This means it is the amount which won’t count toward the lifetime $11.7 million per individual ($23.4 million per couple) gift tax. This is the same level as the estate tax rules.
As a general practice, most people won’t gift assets with a low basis because they have no cover from a step up in basis that comes from passing along assets in a will.
Instead, individuals would chose to set up a trust, which provides a step up in basis at the time of death for the beneficiaries.
Most gifts people give tend to be cash because the basis of cash is its face value. No capital gains or losses get tied up in this gift while gifts of capital losses don’t work well.
Hence why you might consider selling a stock position with an unrecognized capital loss and transfer the cash to the intended recipient. If you have a capital gain, be mindful of the annual exemption amount and know that the original basis transfers with the appreciated stock.
Regardless of these intricate rules, it’s probably best to keep the annual gift values to below $15,000 just so you don’t need to track it and report it for the rest of your life on a tax return.
Depending on your financial circumstance, $15,000 might be trivial. But, for the vast majority of people, it’s a considerable sum and something worth minding.
Does the Stock Gift Recipient Pay Taxes?
When you gift stock to a child, family member or other loved ones, the recipient not only assumes your cost basis but your holding period as well.
Therefore, you want to understand how the recipient plans to use the stock prior to gifting because your tax rates might differ and you could pay less in taxes.
→ Is It Better to Gift Stock or Cash?
If they plan to continue holding it in their custodial account as a child or brokerage account as an adult, you can give stock without worry about taxes. They’ll not need to pay any taxes on a sale anytime soon.
On the other hand, if you earn income in a lower tax bracket than the recipient, you might think about selling it first and then sending the money directly to their account.
As an example, let’s say you give your daughter $15,000 worth of stock that you purchased 15 years ago for $2,500. If she sells it immediately, she’ll owe long-term capital gains taxes on the $12,500 profit.
→ What is the Holding Period for Gifted Stock?
As another choice to consider, you can hold off passing the stock down now and instead bequeath it in your will.
This lets you continue controlling the stock until that time and the recipient’s cost basis becomes the full market value at the date of your death through the stepped-up basis rule.
This could lower your child’s tax liability to save money, providing them more benefits from the stocks you pass down. You should also note that inherited stock, regardless of when you first obtained it, gets treated as “long-term” property.
How to Gift Stock for a Child in a Brokerage Account
To transfer shares to an adult friend or family member only requires the receiver to have a brokerage account. You’ll need to tackle a few logistical hurdles, however, such as getting their account number and possibly more personal details like a Social Security number and other items to perform the stock transfer.
If the intended recipient doesn’t have an investment account, you might consider opening an account for them and funding it as part of their gift. Some even offer free stocks for signing up as well as an additional bonus to transfer money into the account within a certain amount of time at opening.
If you wish to gift stock to a child, you’ll need to have a custodial brokerage account for them to take possession. If they don’t have one of these accounts, several investing apps for minors provide the opportunity for kids and teens to trade stocks and invest in the stock market.
A great addition to their portfolio might include stocks for kids, or companies with mass brand appeal and regular interaction with kids in their daily lives.
Formally, you can start the process of gifting stocks online through your own brokerage.
You may have an option to gift shares or securities you own directly to the recipient once you have the account number, Social Security number and any other details of the receiving brokerage requests for their transfer services.
In the event this isn’t a straightforward option, contact your brokerage firm directly. If you’d like to convert your cash into shares before transferring the stock to a child or other loved one, you’ll have to purchase it in your account and then initiate the transfer to the recipient.
Great Stocking Stuffers (Custodial Brokerages) for Kids
Investing for kids can prove a great way to gift this year. Consider reviewing the following custodial brokerage accounts in the table with special highlights on about a select few apps beneath.
1. Greenlight App
- Available: Sign up here
- Price: Free 1-month trial, $7.98/mo after for Greenlight + Invest
Greenlight + Invest is an investment account for kids that comes paired with a debit card for kids and teens.
It’s easy to use and can double as a savings account and banking app for teens. The app will teach you the basics of investing, how to invest in stocks and ETFs, etc.
It works best if parents and/or grandparents are involved in the process because it requires linked accounts from the custodians’ banks or brokerages.
The all-in-one plan teaches them important financial skills like money management and investing fundamentals — with real money, real stocks and real-life lessons.
You can use the investing feature to:
- Buy fractional shares of companies your kids admire (kid-friendly stocks)
- Start investing with as little as $1 in your account (with fractional shares)
- No trading commissions beyond the monthly subscription fee
- Parents approve every trade directly in the app on individual stocks and ETFs with a market capitalization of $1 billion+
Consider opening a Greenlight Card + Invest account to start investing in a custodial brokerage account for your kids today. The first month is free to trial the product and see if it meets your needs for giving a financial gift to kids.
Read more in our Greenlight Card review.
2. Acorns Early ($10 Bonus)
- Available: Sign up here
- Price: Acorns Lite: $1/mo, Acorns Personal: $3/mo, Acorns Family: $5/mo
Acorns offers a custodial brokerage account for parents interested in opening an investment account for their child called Acorns Early.
Acorns Early offers investment portfolios of various risk levels for kids, so you can feel confident in the account you’re opening up for your little one. This app can be a great way to teach minors how to invest money.
The best part about Acorns is that it doesn’t require any minimum deposit to get started and allows you to contribute money on a regular basis.
One of the best ways to invest $1,000 for their child‘s future is in a custodial account like Acorns Early.
Learn more in our Acorns review.
Firstrade is a leading online brokerage firm offering a full line of investment products and tools designed to help investors improve their financial position through sound investing practices.
One unique feature of Firstrade is that it allows minors to invest (with a custodial account managed by their parents).
As a result, I feature this as one of the best investing apps for minors to buy stocks. It’s a great resource for kids to gain early exposure to the stock market through a custodial account and to start compounding their money from a young age.
Stocking Stuffer Brokerages (and Year Round Gifts) for Adults
4. M1 Finance ($30 bonus)
- Available: Sign up here
- Price: Free trades, $125 subscription to M1 Plus required for custodial account
M1 Finance is an all-in-one personal finance solution that allows new investors to set up an account in seconds. If you want to use this as a kids investing app, you’ll need to apply for an M1 Plus subscription. The company has a limited time offer of the first year for free ($125 value).
The service offers investors the ability to create Portfolio Pies, or a diversified portfolio that rebalances to help you achieve your money goals.
M1 Finance is a service designed for self-directed investors by offering flexible, customizable and automated financial solutions. The platform manages your money intelligently based on how you want.
Consider signing up for an M1 Finance custodial account today.
One of the benefits of E-Trade is the access you receive to educational resources that help teach you how to choose from investing options, conduct analysis, and diversify your portfolio. They have additional trading options and data as a result of acquiring OptionsHouse.
It also offers retirement planning.
E-Trade has three platforms. All are free and have no minimum investment limit.
- Power E-Trade offers investors real-time data and studies.
- E-Trade Web provides live market commentary and stock analysis.
- E-Trade Pro gives you strategy scanners and back-testing.
Each program gives you access to a dashboard where you keep track of your accounts, investments, and make your trades. E-trade does have small fees for options contracts and some fees involved with retirement accounts.
Robinhood became the first free stock app to slash trading commissions to $0. This shook up the industry and caused several competitors to rethink how they make money and follow suit.
Many merged as a result in the hopes of shedding costs and remaining competitive to this investing startup.
Likewise, many new apps like Robinhood have cropped up in recent years, many of which feature on this list.
The service boasts free stock trading alongside index funds, options, penny stocks and cryptocurrencies.
Robinhood’s app offers a simple and easy-to-use design. There aren’t numerous features called out to distract you from what you are using the app to accomplish: trade commission-free.
Yes. You may gift shares to a person of any age without taxable consequence if the amount given is under $15,000 per person per year.
Gift shares to a child, grandchild, family member or other loved one can begin the process of learning to invest in the stock market, how to research the stock of a company (even conduct stock analysis) or generally start the recipient down the path of getting experience with personal finance.
Investing in the stock market to make money for future needs can set someone on a financially secure path. Opening a brokerage account for them as a child is one of the best ways to give stock and teach them about investing.
Consider opening a stock tracking app alongside to monitor their portfolio and make this into an interactive learning activity.
It can be a great head start for building financial literacy and giving them skin in the game to watch their account balance grow with time.
Below, we discuss how to gift stock for a child, family member or loved one by establishing accounts at a broker and allowing them to begin investing in companies which have made money for many investors.
How Does the IRS Know if I Give Stock?
If you give someone more than the annual exclusion amount during the tax year, you must report the gift to the IRS on Form 709. If you don’t report the gift, it could show up during an audit.
This will be how the IRS determines whether you owe gift tax: when Uncle Sam looks into your tax paperwork.
If you are unsure if a friend or family member is in a position to understand the paperwork that accompanies receiving shares as a gift, not reporting the gift could cause future complications.
The amount of money you can gift to one person without incurring any gift taxes is called your annual exclusion. You can give any one person money, stocks, assets or other property up to the exclusion amount, and you will not have to report it.
If you give one person more than the exclusion amount during the year, you must complete Form 709, though you won’t need to pay gift taxes at this time, depending on your lifetime exclusion.
What is the Lifetime Gift Tax Exclusion?
Gift givers should be aware of the annual contribution limit and the lifetime gift tax exclusion (basic exclusion) amount. One potential solution to the gifting dilemma is to give the money as an inheritance, but during your lifetime.
Here’s how it works: When you make annual gifts above the applicable threshold ($15,000 in 2021), you need to report this to the IRS. From here, you apply your gift tax credit to determine if you owed any gift tax.
This amount equals the tax on the basic exclusion amount (commonly called the lifetime gift tax exclusion). This can decrease or even eliminate the deceased’s gift and estate tax.
That’s right, you not only have an annual gift tax exclusion, you also have a lifetime gift tax exclusion. Of note, however, this amount reduces the size of your exemption for calculating the estate taxes at your death.
If the value of your estate less any lifetime gift tax exclusions falls below the annual estate tax exemption ($11.7 million in 2021), you won’t need to worry about gift taxes. If you have any excess above this lifetime estate tax exemption limit, you will face a tax bill for the gifts.
Can You Gift Appreciated Stock to a 529 Plan?
No. You can only gift cash to a 529 plan. You cannot give appreciated stock to this plan because 529 plans only allow specific state-level investment fund options, not individual stocks or other investments you can hold in a taxable brokerage account.