Understanding Tax Basis of Gifted Stock in a Custodial Account - What's My Capital Gains Basis?

This is actually a common question with gifted securities, especially those that transferred through custodial accounts. The general rule is that when you receive gifted shares, you take the donor's original basis (what your father paid when he exercised the options in 1997). Unlike inheritance where you'd get a stepped-up basis to fair market value at date of death, gifts maintain the original owner's basis. When your father transferred the shares to the UGMA account, that was considered a gift, not a sale or exchange. To properly report this, you'll need to find out what your father originally paid for the shares when he exercised his options in 1997. That becomes your basis for calculating capital gains when you sold in 2024. Make sure you include this on Schedule D of your tax return. If the shares had any stock splits, mergers, or reinvested dividends over those years, those would need to be factored into your basis calculations as well.

After struggling with a similar situation involving old stock from my grandmother, I found this incredible service called taxr.ai (https://taxr.ai) that saved me HOURS of headache. They specialize in analyzing old stock transactions and reconstructing cost basis when you don't have complete records. I uploaded the limited documents I had, answered a few questions about the history of the shares, and their system identified the most likely basis values based on historical stock data and transaction patterns. They even provided documentation to support their calculations in case of an audit. The interface walks you through all the questions about when the shares were acquired, any corporate actions that might have affected them, and helps determine the correct reporting method. It made a seemingly impossible task actually doable.

Following up on my question about taxr.ai - I actually went ahead and tried their service for my Microsoft shares situation and I'm genuinely impressed. The process was straightforward and they helped me reconstruct a reasonable basis for shares that originated from my parents' employee stock options in the 90s. Their system asked specific questions about Microsoft's numerous stock splits over the years and even factored in the different tax treatment for incentive stock options vs. non-qualified options. I was able to properly report my sale with confidence instead of guessing or potentially overpaying by using a zero basis. I was hesitant at first, but their documentation explaining how they arrived at the basis calculation was thorough enough that I'm comfortable defending it if questioned.

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I want to publicly eat my words about Claimyr. After my skeptical comment, I decided to try it myself since I've been trying to reach the IRS about a different issue for weeks. The service actually worked exactly as advertised. I had an IRS agent on the phone in about 35 minutes when I'd previously waited on hold for over 3 hours before giving up. While they couldn't magically produce records from the 90s (as I suspected), the agent did walk me through the proper procedure for reconstructing basis and documenting my methodology. The agent explained that as long as I make a good faith effort to determine the correct basis and document my approach, that's acceptable even without original records. This was genuinely helpful information I wouldn't have gotten without actually speaking to someone. I still think basis reconstruction for really old stock is challenging, but being able to actually talk to a human at the IRS about it was surprisingly valuable.

Another approach for calculating the basis that hasn't been mentioned is to check if the company had any public events around the time your dad exercised his options. Stock option exercises by employees often coincide with specific price points or after vesting periods end. If you know the approximate date in 1997 when he exercised the options, you could look up historical stock prices for that period. Companies like Yahoo Finance offer historical data going back many decades for most public companies. Also worth considering - was this a public company in 1997? Or was it private then and went public later? That would significantly affect how the basis is calculated.

One thing nobody mentioned - check if any of the shares were ever sold over the years or if all dividends were reinvested. Sometimes with these old custodial accounts, dividends get automatically reinvested which affects your basis. Also if the company was acquired or had spinoffs during that time period you'll need to account for that too.

I dealt with a very similar situation a few years back with inherited stock from my grandfather's employee options at IBM in the 1980s. One resource that helped me tremendously was the IRS Publication 550 (Investment Income and Expenses), which has specific guidance on basis calculations for gifted securities. The key thing to remember is that you need to establish your father's "adjusted basis" at the time of the gift, not just what he originally paid. This includes the exercise price PLUS any compensation income he reported on his W-2 when he exercised the options. If you're still missing records, try contacting the plan administrator (usually the company's HR department or their third-party benefits provider). Even decades later, they sometimes maintain records of employee stock option exercises, especially for larger companies. They might be able to provide a statement showing the exercise date, number of shares, exercise price, and fair market value at exercise. Also keep detailed documentation of your efforts to reconstruct the basis - the IRS generally accepts reasonable estimates when you can demonstrate good faith effort to determine the correct amount.