Even with an Outright Gift of Stock, Cost Basis Can Still Matter

Most gift planners know that when long-term appreciated, publicly-traded stock is contributed for a gift annuity or a charitable remainder trust, the way in which payments to beneficiaries will be taxed depends in part on the stock’s cost basis.  By contrast, when such stock is used to make an outright gift, cost basis is generally regarded as having no significance, as none of the gain is taxable to either the donor or the charity.

Nevertheless, the donor’s cost basis in the shares of a given company’s stock can sometimes be quite relevant in the context of an outright transfer.  Specifically, it becomes an issue when the donor wants to give less than all of his or her shares and those shares are attributable to different “tax lots.”

Consider this example: Bob owns 200 shares of XYZ Corporation stock, which is currently trading at $50 per share.  He acquired half of the shares in 2006 at a cost of $40 per share and half in 2009 for $20 per share.  Despite the fact that his overall cost basis is $30 per share, if Bob wants to contribute only 100 shares, he would be wise to instruct his broker to draw on the 2009 shares to make the gift.  That way, if he later wants to sell the remaining 100 shares, any capital gain will be minimized, as those shares will have a cost basis of $40 each.

Indeed, Bob should probably be proactive about this.  If he is not, then his brokerage firm may default to satisfying the gift out of the oldest shares first.  In any event, he’ll need to be sure that what he reports in Part I of Section A on IRS Form 8283 as the cost basis of the shares he has contributed is consistent with the way in which his brokerage firm has accounted for the cost basis associated with his remaining 100 shares.