How do capital gains work on stock received as a gift? Well, let's say you bought 100 shares of Carrier Pigeon Communications (ticker: SQAWK) at $50 per share. A year later, they're trading at $100 per share and you give them all to your son. A month after that, he sells them for $110 per share. What's his taxable gain?
It might seem that your son's profit is just $10 per share, but our friends at the IRS don't see it that way. A recipient's cost basis (and holding period) for a gift of stock is the same as the donor's. So, although your son received the stock at $100 per share and held it just one month, his cost basis is $50 per share, and his holding period is 13 months. He can expect to be taxed on a gain of $6,000. And since he's held the shares for more than a year, he'll be taxed at the more-beneficial long-term rate, which is 20% for most people.
The gift is not tax-deductible by you, as it's not a charitable contribution. You're currently allowed to give up to $10,000 to any person, per year, tax-free.