If shares of stock are gifted to me what are my tax responsibilities when I sell?

Question

Gifted to me at $78.00 per share.A cash buyout is soon to take place at $80.00 per share. The gifter was given these stocks as a perk over years for working at the company and has never bought any of the shares.

Answer 1

Your basis is the lower of the donor's basis (adjusted for any Gift Tax paid, if any) or the FMV at the time of the gift to you.  The donor's basis is not necessarily $0 as another poster alludes; whatever value was on the stocks at the time that they received them (and paid income taxes upon) would be their basis in the stocks.  You can research this on Yahoo Finance if you know the date(s) that the donor acquired the stocks.

You pay capital gains tax on the difference between your basis and the net proceeds from the sale.  If you hold them one year or less, the gain is short term and is taxed at your marginal rate.  If you held it for more than one year the gain is long term and is taxed at the lower 15% rate unless your marginal rate is already 15% or less, where the rate is actually 0% for 2008 and 2009.  Normally it would be 5% and will return to that level in 2010.

Answer 2

You would need to verify the status of this acquisition.  If the stock is coming from your employer it may be income to you in which case the entire amount is taxable.  If it is truly a personal gift and not reported by your employer as any form of income you are only liable for the increase in value from the date of the transfer to your name.  If the later is true you may wish to have the giver provide some sort of document that states these stocks were a personal gift.

Answer 3

Since the fair market value ($78) was more than the giver's basis ($0), your basis is the giver's basis + gift tax paid if any.

So in your case, the entire sales price will be subject to capital gains, which makes sense: neither you nor the giver paid anything for them, so the whole thing is profit.

Make sure you own them at least a year and a day for the most favorable cap gains treatment.  The good news is that if you are in the 15% tax bracket and sell them in 2008, the long term cap gain tax rate is 0% anyway!