Question

Simon owns stock that has declined in value since acquired. He has decided either to give the stock to his nephew, Fred, or sell it and give Fred the proceeds. If Fred receives the stock, he will sell it to obtain the proceeds. Simon is in the 15% tax bracket, while Fred's bracket is 25%. In either case, the holding period for the stocks will be short term. Identify the tax issues relevant to Simon in deciding whether to give the stock or the sale proceeds to Fred.

Answer 1

Simon must consider capital gains tax implications, the potential for capital loss deductions, and the difference in tax rates between himself and his nephew in deciding whether to gift the stock or the proceeds from its sale.

Step-by-step explanation:

The question revolves around the tax implications for Simon if he decides to either gift stock that has declined in value to his nephew, Fred, or to sell the stock and gift the proceeds. Several tax issues are relevant in this scenario. If Simon gifts the stock directly, Fred would then sell the stock and be responsible for the capital gains tax, if any. Since the stock has declined in value, if Fred sells at a loss, he may be able to deduct this loss on his taxes, given that he is in a higher tax bracket (25%).

On the other hand, if Simon sells the stock, he would potentially realize a capital loss, which he could use to offset his own capital gains or to deduct against his ordinary income, subject to annual limits and carryforward rules. However, because Simon's tax rate is lower (15%), the tax benefit of the loss is less valuable to him compared to Fred. Furthermore, gift taxes and basis considerations are also relevant in determining the most tax-efficient option.