Final answer:
When Grandma's grandson sells the stock, the tax liability is figured using her cost basis and date of purchase. The gain or loss is determined by subtracting the selling price from the cost basis. Holding the stock for more than a year may qualify for lower tax rates.
Step-by-step explanation:
When the grandson sells the stock, the tax liability is figured using option 2: Her cost basis and date of purchase are used. The cost basis is the original price Grandma paid for the stock, and the date of purchase is the date she acquired the stock. These factors determine the amount of gain or loss when the stock is sold. For example, if Grandma bought the stock for $100 and the grandson sells it for $150, the gain is $50. This gain is taxable, and the tax liability is calculated based on the grandson's tax bracket and the holding period of the stock.
It's important to note that if the grandson holds onto the stock for more than a year after receiving it as a gift, it may qualify for long-term capital gains tax rates, which are typically lower than ordinary income tax rates. Consult a tax professional for specific guidance. When someone gifts stock, the recipient generally assumes the donor's cost basis in the stock. However, for determining the holding period, the clock starts from the date of the gift. This means that the recipient's holding period for tax purposes begins on the date they received the gifted stock.