In general, the transfer of shares as a gift is not a taxable transaction; however, gift tax may apply to the donor. A gift is considered complete when the donor has given up control over the property. For example, the funding of an irrevocable trust is a transfer that represents a completed gift. Conversely, funding a revocable trust is a transfer that does not qualify as a gift since the donor has not relinquished ownership of the security. Marital transfers, including divorce related transfers, are not gifts for tax purposes. The importance of identifying shares acquired by a gift is significant for tax purposes as special cost basis determination rules apply, see below.
Cost Basis of Securities Acquired by Gift
In general, the basis of securities acquired by gift will be the same as the donor's basis unless the securities are in a depreciated position (fair market value is less than donor's basis) at the time of the gift. Basis of gifted security in a depreciated position at the time of the gift cannot be determined until subsequent sell of the security and will have a different basis when sold at a gain than when sold at a loss
- If sold at a gain (a price above donor's basis) – basis will be donor's basis.
- If sold at a loss (a price below donor's basis) – basis will be one of the following:
- Fair market value (FMV) on the date of the gift when the sales proceeds is equal to or less than FMV on date of gift, or
- Sales price when the sales price falls between the donor's basis and FMV on date of gift.
Always consult your tax advisor regarding your specific situation prior to using this information for your tax purposes. For more details about cost basis and your securities, please refer to IRS Publications 550 and 564 at www.irs.gov.
Victory Funds are distributed by Victory Capital Services, Inc.
