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What’s a gift that’s more thoughtful than a stack of cash, doesn’t require leaving the house and keeps on giving longer than a jelly-of-the-month club membership? Stock. And gifting it is easier than you think, and doing so may offer a few perks for you, too.
The benefits of gifting stocks
Hang around seasoned investors long enough, and you’ll likely hear a familiar refrain: If only I’d started investing sooner. Giving stocks as a gift can help your family and friends put this advice into practice — especially kids, who may benefit most from long-term compounding returns.
And if you’re giving stocks you already own, there could be a tax advantage for you. According to Karl Schwartz, a certified public accountant and principal at Team Hewins in Boca Raton, Florida, from a tax perspective, gifting is a smart way to transfer an appreciated stock.
“Let’s say you’re an adult and you have this stock with a lot of gains built into it. If you were to sell it, you would pay taxes on the gain. Assuming it’s long-term, you might pay 15%,” he says. But instead of selling the stock, you could give it as a gift, transferring the gains to the recipient.
“The person who received the stock now has that appreciated stock. They can hold it if they want, but if they sell it, assuming they’re in a lower tax bracket, they might pay 0% in capital gains taxes,” Schwartz says.
Also read: Americans are feeling guilty this Christmas about their finances. Here’s why
In other words, both the giver and receiver (if the receiver has an income less than $40,000 in 2020 as a single filer) could avoid paying capital gains altogether on stock that’s been appreciating for years.
That’s not the only route to giving stocks, though. You can also buy stocks or other securities you don’t already own, then gift them. Here’s how you might consider gifting stocks this year.
Through a custodial account for your kids
One of the simplest ways to get your kids started in stocks is to set up a custodial brokerage account. You’ll be able to transfer existing shares of stock, mutual funds or other securities from your account to the custodial account, or buy specific securities directly within the custodial account. The child will take control of the account when they hit a certain age — typically 18 or 21, depending on the state.
As a virtual stocking stuffer for friends and family
All that’s required to transfer shares to an adult friend or family member is for the receiver to have a brokerage account. There are a few logistical hurdles — you’ll need their account information and a few more personal details to actually perform the transfer — but if a promissory message in a Christmas card is sufficiently exciting, gift away. If they don’t have an account, you could help open and fund one for them as part of the gift.
You can start the process online in your own brokerage account by opting to gift shares or securities you own; if you can’t find that option, contact your brokerage firm directly. If you want to gift a stock you don’t already own, you’ll have to purchase it in your account, then transfer it to the recipient.
To give to charity the wise way
As long as the charity is set up for it, donating stock instead of cash can be a smart way to do good this holiday season.
For example, if you want to donate $1,000 to a charity but have to dip into your portfolio to raise the cash, you might pay capital gains taxes on that sale, netting you less than $1,000 to donate. But if you gave $1,000 in stock instead, there’s no tax consequence for you because you’re not realizing any of the gains, and the charity won’t pay taxes when it sells the stock since it’s a tax-exempt entity. What’s more, you may be able to claim a fair market value charitable deduction on that donation. Want to pass these savings back to the charity? All the merrier.
As an early step toward passing down wealth
If you’re thinking about your legacy, gifting stocks can be a valuable tool, as opposed to liquidating and paying capital gains taxes. The IRS allows you to gift up to $15,000 per year, per person — including stock.
Also read: This year-end stock-selling strategy offsets capital gains taxes and sidesteps the wash-sale rule
This $15,000 limit isn’t bound by familial or marital ties. So technically, you could give $15,000 in stock to all of your children, grandchildren, in-laws, friends and neighbors each year.
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Chris Davis writes for NerdWallet. Email: cdavis@nerdwallet.com.
