What is the cost basis of shares given as a gift?

The cost basis of shares given as a gift is determined by the donor's cost basis. This reflects the original price that the donor paid for the shares, adjusted for any stock splits, dividends, or other corporate actions that may have occurred. When a gift of shares is made, the recipient takes on the donor's cost basis to establish their own basis when they eventually sell the shares.

This method allows the IRS to maintain the tax implications associated with the original purchase price rather than adjusting it to current market value, which could create tax complications for both the donor and the recipient. For instance, if the market price at the time of the gift is lower than what the donor originally paid, the recipient will use the donor's higher cost basis for future capital gains calculations, potentially leading to a taxable gain if sold at a profit later on.

Understanding this concept is crucial for both gift-giving and inheritance situations, as it impacts how capital gains taxes are calculated when the recipient decides to sell the gifted asset in the future.