Question

Simon owns stock that has declined in value since acquired. He has decided either to give the stock to his nephew, Fred, or to sell it and give Fred the proceeds. If Fred receives the stock, he will sell it to obtain the pro-ceeds. Simon is in the 12% tax bracket, and Fred’s bracket is 22%. In either case, the holding period for the stock 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

It appears on the surface that Simon must give the stock to Fred and let Fred sell it, because Fred is in the higher tax bracket (i.e., 22% compared to Simons 12%). But for gift property, the basis of loss to the donee is the lower of (1) the adjusted basis of the donor, or (2) the amount of fair market value (FMV) on the date of the gift. Thus as Fred cannot take benefit of the loss, Simon must sell the stock, deduct the realized loss, and sales proceeds should be given to Fred.

When Simon sells the stock and handover the sale proceeds to Fred, in that case the capital gain received from the stock's sale will be taxed on Simon as per his tax bracket. The transfer of sale proceeds to Fred will not have any impact on tax.