Cost Basis of Gifted Stock: Carryover and Dual-Basis Rules

When someone gives you stock, your cost basis generally equals the donor’s original cost basis for determining gains; however, if the stock’s fair market value (FMV) at the gift date is lower than the donor’s basis, special “dual-basis” rules apply and can change how losses are measured on a later sale. In contrast, inherited assets typically receive a stepped-up basis to date‑of‑death FMV (Fidelity on step‑up).

What follows explains the rules, shows a worked numeric example, highlights common misreads, and gives a short checklist of what to verify in your records.

What Gifted Stock Cost Basis Means

Cost basis is the number used to calculate gain or loss when you later sell an asset. For gifted stock, the basic ideas are:

• “Carryover” basis: the recipient generally takes the donor’s original cost basis for purposes of calculating a gain if the stock is later sold for a price above that basis.
• Dual or split rules when FMV < donor basis: if the FMV at the date of the gift is less than the donor’s basis, tax rules distinguish whether a subsequent sale results in a gain or a loss; the FMV can become the basis for loss calculations while the donor’s basis applies for gains.

Scope: this article covers U.S. tax-style basis treatment for outright gifts of publicly traded securities. It does not cover inherited property (which is treated differently) or employer compensation like restricted stock units — see the “How It Compares With Related Concepts” section for contrasts and the citation to step‑up rules (Fidelity).

How It Works

Mechanically, three outcomes are common when you receive gifted stock. Use these rules to determine which applies to your sale:

1. Donor basis ≤ FMV at gift — selling for more than donor basis:

• The recipient uses the donor’s original cost basis to compute gain..

2. Donor basis > FMV at gift — selling for less than FMV:

• The recipient’s basis for calculating a loss is the FMV on the gift date; this prevents shifting the donor’s unrealized loss to the recipient.

3. Donor basis > FMV at gift — sale price between FMV and donor basis:

• If you sell between the FMV at the gift and the donor’s basis, the tax code treats the sale as neither a gain nor a deductible loss (basically no recognized gain or loss).

Put simply: for gains, you usually inherit the donor’s basis; for losses, the FMV at gift can limit deductible losses in certain ranges. Brokers and tax software commonly ask whether stock was gifted and what the gift‑date FMV and donor basis were when you enter a sale.

Worked Example

Assumptions:

• Donor originally bought 100 shares at $10 per share (donor basis = $10).
• FMV at the gift date = $4 per share.
• You (recipient) later sell at one of three prices: $2, $6, or $12 per share.

Calculations and interpretation:

• Sell at $2 (below FMV $4): your basis for loss is the FMV at gift ($4), so loss per share = $2 − $4 = −$2 (a deductible loss of $2 per share).
• Sell at $6 (between donor basis $10 and FMV $4): the sale price falls between FMV and donor basis, so there is no recognized gain or loss under the split‑basis rule (net tax effect: $0 gain/loss).
• Sell at $12 (above donor basis $10): you use the donor’s basis for gain; gain per share = $12 − $10 = $2 (taxable gain).

This example follows the dual‑basis logic summarized in consumer tax guidance.

How to Interpret It

Interpretation depends on timing, the gift’s FMV relative to donor basis, and your intended holding period:

• Tax outcome depends on your later sale price relative to two anchors: donor basis and gift‑date FMV. Use those anchors to predict whether a sale will produce gain, loss, or neither.
• Documentation matters: to claim the donor’s basis or the gift‑date FMV you will need reliable records (broker statements, trade confirmations, or an appraisal for non‑traded securities). When you report the sale, tax software or your preparer will ask for that information.

Practical consequence: gifting is different from inheriting. If an asset is inherited, U.S. tax rules often “step up” the basis to date‑of‑death FMV, which can eliminate prior unrealized gains for the heir (Fidelity on step‑up in basis). That distinction — carryover basis for gifts versus step‑up for inheritance — is the single biggest practical difference for tax exposure at sale.

Tip: if you’re coordinating gifts for tax planning (for example, to shift future appreciation), confirm documentation and consider how the donor’s basis and the gift‑date FMV interact with your expected sale price.