There are advantages to giving stock as a gift, and this is a particularly good year to put investments under the Christmas tree.
Last year, 65% of Americans said they wanted investments as holiday gifts, according to research conducted by MagnifyMoney. Recipients of the shares could get even more shares for the same amount of cash this year, given that markets are bearish. If they hang on to the gift of stocks, they could see the total value of their current rise with the market over time.
“When there’s a market low or downturn, giving stocks can be beneficial because you can move a particular stock at a price that’s lower than it’s been historically,” said Emily Irwin, executive wealth manager at Wells Fargo. “This can be beneficial if a trust is being funded for someone where that stock is going to be held for a longer period of time.”
In other words, you can now give away more shares of a particular stock for the same price as fewer shares would cost in a more bullish market.
Americans can give gifts of up to $16,000 tax-free under the annual federal gift tax exemption.
“You can give more under the annual exclusion than you otherwise could during any other year. That could be an advantage during the market volatility we see when we gift stock,” Irwin said.
Transfer of capital gains
Equity grantors pass on capital gains — the increase in the value of the asset — to the equity recipient. This avoids capital gains taxes, but the recipient will see the value shaved off the gift when they sell the stock.
“If you donate stock, it has a carryover basis. If I give it to my kid and he decides to sell it, he would pay capital gains tax. That’s the negative for the recipient financially,” Irwin said. “And it’s negative for the donor if the intent is, ‘I want to give $100 in stock,’ because really, a 20 percent haircut is going to be taken.”
Gifts for charity
When you give stock to charity, there are advantages for both the donor and the recipient. Neither party is responsible for paying capital gains taxes.
“If someone gives it to a charity, that’s a slam dunk in almost all circumstances because the charity, even if there’s a built-in profit, doesn’t pay taxes when it sells stock,” Irwin said. “And the donor, the person giving it, will often get a tax deduction for it.”
Using an app
Sure, giving young kids stocks is a great way to introduce them to investment concepts at a young age, experts say.
“It’s a helpful way to start that conversation with your child and give them an idea of what stock ownership is,” said Matt Schultz, LendingTree personal finance specialist.
Schultz likes to transfer stocks using an app, like Stockpile, that helps parents invest on behalf of their children.
You can also open a brokerage account in which you can invest stocks.
“Some people like the physical presence of a stock certificate, but I tell people it’s better to get something like a Schwab account with stock in it,” said Katie Brewer, a certified financial planner based in Dallas, Texas. “After you get the stock certificate, 20 years later when they go to sell it, they won’t have a clue what it was bought for and they won’t know how to report it on their taxes.”