How to determine cost basis when selling stocks that were gifted to me?

Thanks for your response! So even though the fair market value when I received the gift was much higher than the original purchase price, I still have to use the original cost basis? That doesn't seem fair since I only benefited from the $2000 increase that happened while I owned the stock. Will checking that box on Form 8949 prevent me from getting flagged for audit even though my numbers will be different from what's on the 1099-B? I'm really trying to avoid issues with the IRS.

Yes, unfortunately that's how the tax law works with appreciated gifted stock - you inherit the original owner's cost basis. The entire gain from original purchase to when you sold is taxable to you, not just the portion while you owned it. Checking box E on Form 8949 tells the IRS you're reporting a transaction where the basis on your 1099-B isn't correct. This doesn't prevent an audit, but it properly identifies why your numbers differ from what was reported to the IRS. Keep documentation about when you received the gift and its value at that time in case you need to explain the situation.

Did the service tell you anything about the holding period? Like does that transfer too? I've got some stocks my grandma gave me and I'm not sure if I should be reporting short-term or long-term gains when I sell.

I'm skeptical that an AI tool could really help with something this specific. Did you have to upload your actual 1099-B or could you just describe your situation? Seems like this is the kind of thing you'd need a real tax professional for.

Yes, they explained that for gifted stock, you actually inherit both the cost basis AND the holding period. So if your grandma held the stock for years before gifting it to you, you get credit for that time. Even if you only held it for a month before selling, you could qualify for long-term capital gains treatment if the total holding period exceeds one year. You can either upload your documents or describe your situation - I did both to be sure. The AI analyzes tax documents incredibly well, but I also typed out my specific concerns. It gave me specific IRS references and walked me through the exact forms and boxes I needed to complete. Much more detailed than the generic advice I got elsewhere.

Wait, so this service somehow gets you to the front of the IRS phone queue? How does that even work? Sounds too good to be true.

I don't buy it. There's no way to "skip the line" with the IRS. They're chronically understaffed and everyone has to wait. This sounds like a scam that takes your money and just puts you on hold like everyone else.

It doesn't put you at the "front" of the queue - it automates the waiting process. Their system calls the IRS and navigates the phone tree, then holds your place in line. When it finally reaches an agent, you get a call back so you can take the call. You don't have to sit there listening to hold music for hours. They use technology to manage the waiting process so you don't have to. I was skeptical too, but it legitimately worked. I connected with an IRS agent after their system waited on hold for about 2 hours - but I only had to spend 15 minutes of my time actually talking. It's basically like having someone else wait in line for you.

That's really helpful, thanks! In my case the stock definitely increased from when it was purchased originally, but good to know about these other scenarios. Does the IRS ever question these adjustments when we report them? Do I need any special documentation from the person who gave me the stocks?

The IRS might question it if there's a significant discrepancy, which is why documentation is important. You should try to get the following from the gift giver: date they originally purchased the shares, their original cost basis, and the fair market value on the date you received the gift. If possible, get a written statement from them confirming these details. Keep records of any transfer documents or account statements showing when the shares moved to your account. The more documentation you have, the easier it will be to explain if questions arise.

The $17,000 annual gift exclusion just means the GIVER doesn't have to report the gift or pay gift tax on it. It doesn't exempt the RECEIVER from capital gains tax when they sell the asset. The tax code is designed to ensure all capital gains eventually get taxed. If the gifter sold the stock and gave you cash, they'd pay tax on all the gains. By giving you the stock instead, they're essentially transferring their tax obligation to you. That's why you inherit their cost basis.

This is really helpful, thank you! I'm new to dealing with gifted stock situations and this whole thread has been eye-opening. I had no idea that you inherit both the cost basis AND the holding period from the original owner. One quick question - when you say "keep documentation of when you received the gift and its fair market value," do I need to get this from the person who gave me the stock, or can I just look up the stock price on that date myself? I want to make sure I have everything properly documented in case the IRS asks questions later. Also, is there a specific form the gift giver should fill out, or is it just informal documentation between us?

Great question! You can look up the fair market value yourself using the closing price on the date you received the gift - you don't need the giver to provide this. However, it's helpful to get some basic documentation from them confirming: 1. The date they originally purchased the stock 2. Their original cost basis (what they paid) 3. The date they transferred it to you There's no specific IRS form required for the gift itself (since it's under the $17K reporting threshold), but a simple written statement or email from the giver with these details can be very helpful. Some people also keep screenshots of their brokerage transfer confirmations. The key is being able to demonstrate the timeline and amounts if the IRS ever questions the basis adjustment. Most of the time they won't, but having this documentation gives you peace of mind and makes the whole process much smoother. @a05e8abdb230 covered all the main points perfectly - the Form 8949 reporting is really the critical piece here!

Thanks for sharing your experience! That's a really helpful way to think about it - the gifter is essentially passing along their unrealized gains. I've been stressed about this whole situation but hearing from people who've actually been through it makes me feel much better. Quick question about the holding period benefit you mentioned - does that apply even if the original owner held the stock in a different type of account? My relative had the shares in a regular brokerage account but transferred them to my Roth IRA. I'm wondering if that changes anything about inheriting their holding period or if I need to start fresh with my own timeline. Also really appreciate everyone mentioning the importance of keeping email records. I'm going to reach out to my relative today to get those details documented properly before I file my taxes.

That's a great question about the Roth IRA transfer! Unfortunately, when stocks are transferred into a retirement account like a Roth IRA, it's treated differently than a regular taxable gift. If your relative transferred the shares directly into your Roth IRA, that would actually be considered a contribution to your retirement account rather than a gift of securities. This means you wouldn't inherit their cost basis or holding period - instead, your basis in the Roth would be the fair market value on the date of the contribution. However, if they first gifted you the shares in a regular taxable account and then YOU chose to sell them and contribute the proceeds to your Roth, that's different - you'd still be subject to the gifted stock rules for the sale. The rules get pretty complex when retirement accounts are involved, so you might want to double-check with a tax professional or use one of the AI tools others mentioned to make sure you're handling this correctly. The contribution limits and other Roth IRA rules could also come into play depending on the amount involved.

This is exactly the kind of reassurance I needed to hear from someone who works in tax preparation! I've been overthinking this whole situation and worrying about potential red flags, but it sounds like these adjustments are actually pretty routine. Your point about it being MORE problematic to NOT make the adjustment is really helpful - I hadn't thought about it that way. I was so focused on worrying about the numbers not matching the 1099-B that I didn't consider how wrong it would be to just accept those numbers. I'm definitely going to go with one of the major tax software options you mentioned. It's good to know they have specific workflows for this situation. I was considering trying to do it manually but having the software guide me through the process sounds much safer. Thanks for the practical advice about documentation too. I was starting to think I needed some kind of formal paperwork, but a simple email from my relative should be enough. I really appreciate you taking the time to share your professional perspective - it's made me feel much more confident about handling this correctly!

Thank you so much for sharing your experience! It's really reassuring to hear from someone who went through the exact same situation. I was starting to feel like I was the only one dealing with this confusion, but it sounds like gifted stock situations are actually pretty common. Your point about the long-term capital gains benefit is something I hadn't fully considered - that could definitely help offset some of the frustration of having to pay taxes on gains from before I owned the stock. Do you remember roughly how much the long-term vs short-term rate difference saved you? I'm trying to get a sense of whether that benefit might make this whole situation a bit less painful. Also, I love that you just kept a simple text from your grandma as documentation. I was overthinking the record-keeping aspect and wondering if I needed something more formal. A text message sounds much more manageable and probably just as effective for proving the basic details if the IRS ever asks. Thanks for the encouragement - hearing from people who've actually been through this process successfully definitely makes me feel more confident about handling it myself!

The long-term vs short-term difference can be pretty significant! In my case, I was in the 24% tax bracket, so short-term gains would have been taxed at 24%. But since I qualified for long-term treatment, I only paid 15% on the capital gains. On about $14k in gains, that saved me roughly $1,260. The exact savings depend on your income level and tax bracket, but for most people the long-term rates (0%, 15%, or 20%) are much better than ordinary income rates. It definitely helped make the whole situation feel less unfair when I realized I was getting that benefit. And yes, the text message documentation worked perfectly fine! The IRS isn't looking for anything fancy - they just want to be able to verify the basic facts if they ever need to. Simple and straightforward is usually the best approach with tax documentation. You're definitely going to be fine handling this yourself. The fact that you're being thoughtful about it and asking the right questions shows you're on the right track!