ASK KIM
Figure the Cost Basis for Gifts
by Kimberly Lankford

My brother wants to give me stock he bought for much more than its $10,000 value. When I sell, is my tax basis what he paid or the price on the day I receive it?

I hope you're sitting down because the answer is a doozy. Because the stock has declined in value, your basis depends on how much you get when you sell it.

Let's assume your brother bought the stock for $20,000, and it's worth $10,000 at the time of the gift. If you sell for less than $10,000, your basis is the $10,000 date-of-gift value, so you can claim a tax loss equal to the decline in value after the gift. (No one gets a deduction for the drop in value before the gift.)

If you sell for more than $20,000, then $20,000 is your basis, and your profit is measured from that point. If you sell for between $10,000 and $20,000, you have neither a gain nor a loss. It might be best for your brother to sell the stock and claim the tax loss himself -- and give you $10,000 in cash.

For more information about how to figure the cost basis for gifts, see page 43 of IRS Publication 550 Investment Income and Expenses.