Gift Your Depreciated Stock Shares

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Stock Market All RedI heard this “tip” the other day involving how you could take advantage of the market downturn. Each year, you’re permitted to give up to $12,000 to someone else as a gift absolutely tax free. If you give more than $12,000 to one person, you’re personally obligated to declare it and pay taxes on the gift (yep, it’s in reverse of what you’d expect). So, the suggestion is then to give your depreciated shares as a gift now, before the shares are likely to rebound, so that you can make the most of your gift.

Sound like a crazy idea? (It sounds crazy to me) It’s not so crazy if you subscribe to the idea that the stock market will always appreciate in the long run (if you don’t, then you better not have any shares of anything!), but it’s certainly one way to find a silver lining in this ugly stock market cloud we’ve been under!

The Mechanics

If you are actually going to do this, this is how you do it right. These steps are different than if you gift appreciated property (stock is considered property), so please follow them carefully. You will need to do the following to properly document the gifting of your shares:

  1. Obviously, give the shares to your beneficiary.
  2. Document the fair market value of the shares by writing a gift letter that indicates the gift and its fair market value at the time of the gifting.

Appreciated vs. Depreciated

The is a big difference between donating appreciated stock and depreciated stock. If the stock has appreciated, the recipient has to claim the appreciation when it is sold. People often take advantage of this by gifting appreciated stock to their children, or family members in a lower tax bracket. With depreciated stock, no one gets to claim the loss. So, it might make more immediate sense to sell the stock, recognize the loss, then give the money to your beneficiary and then have them buy the shares back.

To be honest, I wouldn’t do it. I like crazy, out of the box thinking as much as the next person, but this one doesn’t seem to make much sense to me. It makes more sense to claim the loss against any gains that year, then give the money. The recipient can always buy the shares on the open market and pay the commission.

(Photo: rednuht)

{ 4 comments, please add your thoughts now! }

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4 Responses to “Gift Your Depreciated Stock Shares”

  1. Posco says:

    It doesn’t make sense to me, either. And, while it’s generally true that long-term performance of the general stock market is positive, there’s no guarantee that one particular depreciated stock will rebound anytime soon — that depends a lot on which company’s stock it is! That would make a pretty bummer gift to receive.

  2. Eli says:

    I agree…it’s not worth the hastle. Nobody really gains. Like you said, sell the shares at a loss to offset your income and give the money away. The recipient can invest how he/she sees fit. Transaction fees are negligible these days.

  3. Evan says:

    I think you are missing the point of this great piece of advice. Disclaimer first: I am a director at a fee based Financial Planning Firm with a B.S. Economics and a J.D. – and do this daily.

    This technique is used for those with estate tax “problems.” Lets say you have an estate worth approximately $5,000,000 – and you are allowed to give $12K/yr per recipient (doesn’t have to be family btw). If you have IBM stock “worth $12k” and you believe that IBM will go up in the LONG TERM. You can give it to that recipient (they get your tax basis!) – and hopefully 10 years down the line that $12K gift is really $18 – $24K OUT OF YOUR ESTATE.

  4. Joe says:

    Evan, being a JD/BS/Fin. Planner and all, please enlighten us. Why wouldn’t your client(s) be better off doing what Jim said — sell the stock at a loss, take the offset on taxes this year (if short term @ marginal tax rate) and give the cash. The recipient can then buy the IBM stock himself/herself and it would go up or down just the same. Giving depreciated stock seems pretty dumb.

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