Ah, the holiday season. Smells of fir and pine, gingerbread houses and hot chocolate. It could be the most wonderful time of the year, but there’s always that one thing hanging over your head: What in the world do I give my friends and family this year?
My own holiday purchases range from last-minute presents to crafty concoctions, and though I try to think out of the box, I still find it hard to come up with something personal and unique. This year, I came across an interesting idea: gifting stocks.
Stocks are a one-of-a-kind gift idea with many perks. Not only will the person on your list be entitled to shareholder benefits, but they may also realize a profit. However, because there are important tax implications and some logistical hurdles to consider, it’s not as simple as buying a toy from your local Target. Here’s everything you need to know about giving stocks this holiday season.
Why is giving stocks a good idea?
Stocks have the potential to gain value after you give them, though there’s always the risk of them losing value, too.
“Most tangible things that we buy -- whether it be a car or a piece of electronic or clothing -- the value depreciates immediately after it’s sold, whereas theoretically a stock or an investment begins to appreciate,” said Stephen Mathai-Davis, cofounder and CEO of the robo-investing platform Q.ai.
If you give stocks, the value of your present can increase well after the holidays, but that isn’t the only benefit. Someone who owns stock also gets shareholder perks, which means they’re entitled to annual company reports and voting rights. Some may also come with dividends along with other benefits the company offers its shareholders.
Who should I give stocks to?
A stock gift could be good for children or young adults, since it can help motivate them to understand their new investments and improve their financial literacy.
“Gifting stocks is a great way, in my opinion, to accelerate the financial literacy of kids,” Mathai-Davis said. “It was a way to expose my kids to it really early on, so they get just comfortable with it.”
Beyond the younger crowd, stocks make a great gift for any of your friends whose TikTok “For You” feed consists of personal finance content. If money is their shtick, assume they’d be ecstatic about receiving stocks for the holidays.
How do I go about giving stocks as a gift?
Making a gift of stocks has never been easier. Access to brokerage accounts through apps like Robinhood has made owning financial assets a breeze -- and it’s also made it easier to transfer securities to others.
You can purchase stock through your brokerage account and transfer it to the recipient’s brokerage account. You don’t need to have an account with the same broker, but you will need the recipient’s brokerage account information to make the transfer.
Another option is to give stocks through online platforms like GiveAshare and Unique Stock Gifts, which specialize in gifting stocks. These services send you a framed certificate of the stock (if the company you’re purchasing from hasn’t stopped issuing physical certificates). The giftee can then transfer the physical certificate to their brokerage account.
For children, it’s best to set up a custodial account, which the child can take charge of once they reach an appropriate age, typically 18 years old. You can transfer stock straight from your brokerage account to their custodial account.
What kind of stocks should I give?
The best place to start is with the giftee’s interests. Online platforms like GiveAshare and Unique Stock Gifts let you search for stocks by category or business sector. So, if the person on your list is a huge Marvel nerd, you might consider Disney stock. If your giftee cares about socially responsible investing, you could search for stock from clean energy companies.
What are the tax implications for me as the gift-giver?
As the person giving the stock, you mostly get to offset tax liability to the recipient. As long as the gift is less than $15,000, you don’t need to report it from a gift-tax perspective, according to April Walker, lead manager for tax practice and ethics with the American Institute of Certified Public Accountants.
If the value of the stock you give is more than $15,000, then you would need to file a gift tax return for the amount that’s above the $15,000 threshold. For example, if you’re giving $20,000 worth of stock, you’d need to file a gift tax return and report $5,000, according to Walker.
However, because every individual has a lifetime gift exclusion of $11.7 million, you won’t pay any tax until you’ve given that amount. In other words, until you’ve actually managed to give an accumulated $11.7 million, you won’t be taxed for gifts. And since you don’t realize any of the profits once that stock is sold, you aren’t liable for capital gains tax, either.
What are the tax implications for the gift recipient?
The person receiving the stock as a gift is responsible for capital gains tax. That’s the tax that’s paid on the sale of a noninventory asset, or in this case, it’s the amount of tax paid on the profit gained from the recipient selling the stock. What someone will pay in capital gains tax depends on their income, tax bracket and the capital gains rate for that bracket, according to Walker.
The timing of the sale also matters for tax purposes. If the gift recipient sells the stock within a year of receiving it, they’d pay short-capital gains. After a year, they’d pay long-term capital gains. The clock starts ticking when the giver originally bought the stock. From a tax perspective, they’re going to get a better tax outcome with long-term capital gains because they’ll get a beneficial rate.
If the recipient loses money on the stock, meaning they sold the stock under the price tag that it was bought for, they may be able to write off the loss, known as capital losses (e.g., the opposite of capital gains).
“You can use capital losses to offset capital gains during a tax year,” Walker said. “If capital losses exceed capital gains, you can use capital losses to offset ordinary income up to $3,000 per year. Once you go over that $3,000, the remainder of the loss will carry forward to a future period to either offset future capital gains or to be used $3,000 each year until exhausted.” This means that if someone loses $30,000 in one taxable year without capital gains to offset, they can write off $3,000 from ordinary income for the next 10 years.
However, if gains still exceed losses, then the net capital gain will be taxed at the appropriate capital gain tax rate, depending on whether it’s long-term or short-term. Your net capital gain is the difference between your net long-term capital gain and your net short-term capital loss for the taxable year, according to the IRS.
Work with a tax professional
Whether you’re giving the gift of stock or receiving it, you may want to work with a tax professional, such as a CPA. Not only will they help ensure you’re reporting and paying tax correctly, but they’ll help you find the most beneficial tax scenario for you.
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First published on Dec. 11, 2021 at 6:00 a.m. PT.
