Q&A: Giving a gift with a built-in loss

Dear Liz: You recently answered a question about the tax implications of gifting stock to children. You mentioned that if the stock had lost value since its purchase, the children could use the loss to offset capital gains or, in the absence of gains, up to $3,000 a year of income, with the ability to carry over that loss to subsequent years until it’s used up.

But if a stock has a built-in loss, why not sell it, realize the loss and give the kids the cash? That way, the loss is sure to be recognized unless the donor dies before fully utilizing the capital loss or the carryover. If the child really wants that particular stock, he or she can use the cash to buy it. The children would have to be mindful of the wash-sale rules that prohibit deducting a loss if a related party buys the same stock, but waiting 31 days would be enough to avoid that.

In my view, there’s rarely a good reason to gift a stock (or most other assets) that has a built-in loss.

Answer: Exactly. Selling the asset and taking the tax benefit usually makes more sense than transferring the shares. The loss essentially evaporates, because the assets get a new value for tax purposes when transferred.

Selling losing stocks is certainly better than bequeathing them to your heirs. The loss essentially evaporates at your death, because the assets get a new value for tax purposes, so no one gets the potential tax break.

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Comments

  1. Michael Weinstein, CPA says:

    Hi Liz,

    According to this post in your previous post you advised that if a donee was gifted stock where the FMV of the stock on the gift date was less than the donor’s basis the donee could later sell the stock and report a taxable loss. This is incorrect advise. Persuant to IRC 1015(a) for purposes of determining a loss the reportable basis is the FMV on the gift date. Please advise your readers of this fact.