Tax implications for stock gifts: How to determine cost basis for inherited shares I'm gifting to my child

This is a great question about a multi-generational gift! When stock is gifted to you, the cost basis generally carries over from the original owner (your aunt). This is called "carryover basis." So your cost basis for those Microsoft shares would be whatever your aunt originally paid for them, not the $285 value when you received them. Now when you gift these shares to your daughter, the same principle applies. Your daughter's cost basis would be the same as yours (which is your aunt's original purchase price). The value at the time you give the shares to your daughter doesn't become the new cost basis. One important exception: if the market value of the stock was LOWER than your aunt's basis when she gifted them to you, there's a special rule for calculating losses. But since Microsoft has generally trended upward, this probably doesn't apply to your situation. Also remember there are annual gift tax exclusion limits ($17,000 for 2024). Gifting 250-300 shares at current values would likely exceed this amount, so you'd need to file a gift tax return (Form 709), though you probably won't owe any actual gift tax unless you've used up your lifetime exemption.

I went through almost the exact same situation with Apple stock and found this online tax service called taxr.ai (https://taxr.ai) that was super helpful with figuring out all this gifted stock stuff. I uploaded my brokerage statements and some old emails from when I received the stocks, and their system sorted through everything and gave me a detailed report on the proper cost basis to use for both myself and when I transferred some to my son. What I really liked is they have this feature where they specifically address multigenerational transfers like yours - where you received stock as a gift and then gift it again. They even helped me document everything properly for future reference so my son won't be confused when he eventually sells some shares. Definitely worth checking out since cost basis for gifted stocks gets complicated fast.

I just wanted to follow up after trying taxr.ai for my IBM stock situation I mentioned. It actually worked really well! I uploaded the limited information I had, including the approximate year my dad bought the shares and some old statements he found. The system was able to calculate a defensible cost basis by researching historical IBM prices, accounting for all the stock splits and dividend reinvestments. They even created documentation explaining their methodology that I can keep with my tax records in case of an audit. What surprised me most was how they handled the multi-generational aspect - they clearly outlined what my dad's basis was, what mine is now, and what my children's would be if I decide to gift them shares in the future. Really clarified something I've been confused about for years!

After reading these comments, I realized I had a similar issue when trying to figure out cost basis for stocks my grandfather gave me. I spent WEEKS trying to get through to someone at the IRS who could help me understand the gift tax rules. Constantly on hold, disconnected calls, couldn't get a straight answer. Finally found this service called Claimyr (https://claimyr.com) that got me a callback from the IRS within about 45 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. Instead of waiting on hold forever, they somehow navigate the IRS phone system for you and call you when an actual agent is on the line. The IRS person I spoke with walked me through all the gift tax implications, confirmed what forms I needed, and answered my questions about basis calculation. Honestly didn't think it would work but it saved me hours of frustration. Just sharing since it sounds like several of us are dealing with similar gifting questions that might need IRS clarification.

I need to apologize for my skeptical comment earlier. I actually tried Claimyr after posting because I've been trying to get through to the IRS about a similar gifted stock situation for weeks. The service actually worked exactly as described. I kept getting disconnected after waiting on hold for an hour+ when trying on my own. With Claimyr, I got a call back in about 40 minutes with an actual IRS agent on the line. They helped clarify that in my situation (similar to OP's), I needed to maintain documentation of the original purchaser's cost basis and acquisition dates. The agent also explained how to handle the gift tax return since my gift exceeded the annual exclusion. I was completely wrong about this being a scam. It legitimately saved me hours of frustration, and I finally got the answers I needed. Sometimes being proven wrong is a good thing!

One thing nobody has mentioned yet - make sure you check if the original shares were in a UGMA/UTMA account. My parents "gifted" me shares that were technically already mine in a custodial account they controlled until I turned 21. This significantly impacts the cost basis calculation since those aren't technically gifts. Also check if any of the shares come from dividend reinvestment plans (DRIPs) over the years. Each reinvestment creates a new lot with its own cost basis. This could mean your aunt's 1000 shares actually have dozens of different purchase dates and costs that need to be tracked separately.

Has anyone used TurboTax for handling this kind of gifted stock situation? I'm wondering if it walks you through all the basis calculations or if you need something more specialized?

This is exactly the kind of situation where keeping meticulous records is crucial! I went through something similar with Boeing stock my grandmother left me. One thing I learned the hard way is that you should also consider the timing of when you gift the shares to your daughter. If she's starting college next year, think about her income level - if she's in a lower tax bracket, the capital gains tax rate when she eventually sells could be more favorable (potentially 0% or 15% instead of 20%). However, this could also affect her financial aid eligibility since assets in the student's name are weighted more heavily than parent assets in FAFSA calculations. You might want to consider whether it makes sense to sell some shares yourself first and gift the cash instead, or use a 529 education savings plan transfer. Each approach has different tax implications. Given the complexity with the multi-generational gifting and potential DRIP complications others mentioned, I'd really recommend consulting with a tax professional who specializes in estate and gift planning before moving forward.

Great question! As a newcomer to this complex topic, I'm learning a lot from this discussion. One thing I'm wondering about is whether there are any state-level implications to consider in addition to the federal tax rules everyone's discussing? I live in California, which I know has its own gift and inheritance tax rules. Would the cost basis carryover rules work the same way for state taxes, or could there be additional complications when gifting stock across state lines? For example, if your aunt lived in a different state when she originally purchased the Microsoft shares, or if your daughter will be attending college in another state where she might establish residency? Also, since several people mentioned the importance of documentation - is there a specific format or type of documentation that the IRS expects for gifted securities? I want to make sure I'm prepared if I ever find myself in a similar situation with family stock transfers. This thread has been incredibly helpful for understanding how complex these multi-generational transfers can be!