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Are you considering selling gifted stock and want to know how it will affect your income taxes? Understanding the tax implications of selling gifted stock is crucial for making informed financial decisions. In this article, we will delve into the topic of selling gifted stock income and how it is taxed in the United States.
Understanding Gifted Stock
First, let's clarify what gifted stock is. Gifted stock refers to shares of a company that have been transferred to you as a gift from another individual. This could be a family member, friend, or even a charity. When you receive gifted stock, you inherit the stock's cost basis, which is the original purchase price of the shares.
Capital Gains Tax
When you sell gifted stock, the income you earn from the sale is considered a capital gain. Capital gains are taxed differently from ordinary income, and the tax rate 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 income is classified as a long-term capital gain. Long-term capital gains are taxed at a lower rate than short-term capital gains, which are taxed as ordinary income.
- Long-Term Capital Gains Tax Rate: In the United States, long-term capital gains are taxed at a maximum rate of 20% for individuals with taxable income over $441,450 in 2021. For those in the 10% or 12% tax brackets, the rate is 0%.
- Short-Term Capital Gains Tax Rate: Short-term capital gains are taxed at your ordinary income tax rate, which can be as high as 37%.
Determining the Cost Basis
When calculating the capital gains tax on gifted stock, it's essential to determine the correct cost basis. The cost basis of gifted stock is typically the fair market value of the stock on the date it was gifted to you. This value is usually the stock's closing price on the day of the gift.
Case Study: Selling Gifted Stock
Let's consider a hypothetical scenario to illustrate the tax implications of selling gifted stock. Suppose you received 100 shares of Company XYZ as a gift from your uncle. The stock was worth
- Cost Basis: The cost basis of the gifted stock is
1,000 (100 shares x 10 per share). - Proceeds: The proceeds from selling the stock are
1,500 (100 shares x 15 per share). - Capital Gain: The capital gain is
500 ( 1,500 - $1,000). - Tax Rate: Since you held the stock for more than a year, the capital gain is considered a long-term capital gain. Assuming you fall into the 15% tax bracket, the tax on the capital gain would be
75 ( 500 x 15%).
Conclusion
Selling gifted stock can result in capital gains, which are taxed differently depending on the holding period. Understanding the tax implications and determining the correct cost basis are crucial for making informed financial decisions. Always consult with a tax professional or financial advisor to ensure compliance with tax laws and maximize your financial benefits.
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