How does the IRS treat gains from selling a gift of stock?

When a recipient sells a gift of stock, the Internal Revenue Service (IRS) treats the sale based on the donor's basis in the stock rather than the fair market value at the time of the gift. This means that the recipient inherits the donor's cost basis, which is the original amount the donor paid for the stock. As a result, when the stock is sold, the gain or loss that the recipient realizes is calculated based on this inherited basis.

For example, if the donor purchased the stock for $1,000 and later gifted it to the recipient when it had a fair market value of $1,500, if the recipient then sells the stock for $1,800, the taxable gain is based on the donor's basis of $1,000, resulting in a $800 gain for tax purposes. This treatment prevents the donor from being taxed on appreciation that occurred before the gift was made, and it reflects the intent of tax law regarding the transfer of assets without considering their date of valuation at the time of gifting.