Is Selling Gifted Stock Income Taxed in the US? A Comprehensive Guide

Are you considering selling gifted stocks and want to know how it will affect your income tax? Understanding the tax implications of gifted stocks is crucial for making informed financial decisions. In this article, we'll delve into the details of selling gifted stock income and its tax implications in the United States.

Understanding Gifted Stocks

A gifted stock refers to shares of a company that are transferred to you without any consideration, meaning you receive them as a gift. These stocks can come from friends, family members, or even unrelated individuals. It's important to note that gifted stocks are distinct from inherited stocks, which have different tax rules.

Capital Gains Tax on Sold Gifted Stocks

When you sell gifted stocks, the income generated from the sale is considered a capital gain. The tax rate on this gain depends on several factors, including your taxable income and the holding period of the stock.

Long-Term vs. Short-Term Capital Gains

If you hold the gifted stock for more than a year before selling it, the gain is classified as a long-term capital gain. The tax rate for long-term capital gains is typically lower than the rate for short-term gains.

For example, in 2021, the tax rate for long-term capital gains is 0%, 15%, or 20%, depending on your taxable income. If you sell the stock within a year of receiving it, the gain is considered a short-term capital gain, which is taxed as ordinary income.

Calculating the Taxable Gain

To calculate the taxable gain from selling gifted stocks, you need to determine the difference between the selling price and the cost basis of the stock. The cost basis is usually the fair market value of the stock at the time of the gift.

For instance, if you received 100 shares of a company's stock as a gift, and the fair market value at that time was 10 per share, your cost basis would be 1,000. If you sell the stock for 15 per share, your taxable gain would be 1,500.

Reporting the Sale on Your Tax Return

It's crucial to report the sale of gifted stocks accurately on your tax return. You'll need to use Form 8949 and Schedule D to calculate and report the capital gains.

Example Case Study

Let's consider a hypothetical scenario. John received 100 shares of a company's stock as a gift worth 10 per share. Two years later, he sells the stock for 15 per share. His taxable gain is 1,500, which is considered a long-term capital gain. Assuming John's taxable income is 80,000, his tax rate on this gain would be 15%, resulting in a tax liability of $225.

Important Considerations

Before selling gifted stocks, it's essential to consider the following:

• Tax Brackets: Your tax rate on the capital gain depends on your overall taxable income. Be aware of the tax brackets and ensure you're in the lowest possible bracket.
• State Taxes: Some states also tax capital gains, so it's important to check your state's tax laws.
• Tax Planning: Consider the timing of your sale to optimize your tax liability. Selling stocks in a year with lower taxable income can help reduce your tax bill.

Selling gifted stocks can be a significant source of income, but it's crucial to understand the tax implications. By following the guidelines outlined in this article, you can ensure that you're compliant with tax laws and make informed financial decisions.

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