When you gift an asset to your child that has appreciated in value, such as appreciated stock, your child’s basis (cost) in that asset is considered to be the same as your original cost, not the current value of the property. This means that upon sale of the asset, your child will have the same amount of capital gain that you would have had. The difference is that your child may owe less capital gains taxes if he or she is in a lower tax bracket.
Assume that you are in the 33 percent tax bracket and your child is in the 10 percent tax bracket and you gift 100 shares of stock to your child. You purchased the stock four years ago at $15 per share; it is now worth $60. Your child’s basis in the stock is considered to be $1,500 (100 x $15). If your child sells the stock at its current price, he or she has recognized a $4,500 gain, resulting in zero capital gains taxes (the rate on long-term capital gains for taxpayers in the 10 percent tax bracket is zero percent). By contrast, if you had kept the stock and sold it yourself, your gain would have been the same, but you would have owed $675 in taxes (15 percent long-term capital gains rate for taxpayers in 33 percent tax bracket).