Is Selling Gifted Stock Income Taxed in the US?

Understanding the Tax Implications of Selling Gifted Stocks

In the United States, the sale of gifted stocks can be a significant financial move, but it's crucial to understand the tax implications involved. This article delves into the intricacies of selling gifted stocks and the associated tax obligations.

What are Gifted Stocks?

Before we delve into the tax implications, let's define what gifted stocks are. Gifted stocks are shares of a company that have been transferred to you from someone else without any consideration. This transfer can be from a family member, friend, or any other individual.

Capital Gains Tax on Sold Gifted Stocks

When you sell gifted stocks, the income generated from the sale is typically considered a capital gain. This means you may be subject to capital gains tax. The rate at which you'll be taxed depends on several factors, including your total income and the holding period of the stock.

Long-Term vs. Short-Term Capital Gains

If you hold the gifted stocks for more than a year before selling, the gains are classified as long-term capital gains. The current long-term capital gains tax rates in the U.S. range from 0% to 20%, depending on your taxable income.

On the other hand, if you sell the stocks within a year of receiving them, the gains are considered short-term capital gains. Short-term gains are taxed at your ordinary income tax rate, which can be quite high, especially if you're in a higher tax bracket.

Taxable Income and Tax Rate

The amount of tax you'll pay on the sale of gifted stocks depends on your taxable income. If your taxable income is below 441,450 for married filing jointly or 445,850 for single filers in 2021, your long-term capital gains tax rate will be 0%. If your income exceeds these thresholds, the rate increases to 15% or 20%.

Taxable Income and Short-Term Capital Gains

For short-term capital gains, the tax rate is based on your ordinary income tax rate. This means that if you're in the 22% tax bracket, your short-term capital gains will be taxed at 22%.

Example:

Let's say you received 100 shares of a company as a gift. Each share is worth 100, making the total value of the gift 10,000. If you sell the shares after holding them for two years, you'll pay a 15% capital gains tax on the 10,000 gain, which amounts to 1,500.

Reporting Gifted Stocks

When selling gifted stocks, it's essential to report the transaction correctly on your tax return. You'll need to provide the basis of the gifted stock, which is the value of the stock at the time of the gift. This information is typically provided by the giver of the gift.

Conclusion

Selling gifted stocks can be a lucrative financial move, but it's crucial to understand the tax implications involved. By being aware of the capital gains tax rates and your taxable income, you can plan effectively and minimize your tax obligations. Always consult with a tax professional for personalized advice tailored to your specific situation.

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