Gift Tax Basis
When a capital asset is received as a gift, the recipient generally inherits the donor's original cost basis (carryover basis), meaning any pre-existing unrealized gain transfers to the recipient for future capital gains tax purposes.
Gift tax basis — more formally known as 'carryover basis' — governs the cost basis that a recipient receives when acquiring a capital asset as a gift rather than through purchase or inheritance. Under IRC Section 1015, the donee (gift recipient) generally takes the donor's adjusted basis in the gifted property, meaning any unrealized capital gain that accrued while the donor held the asset carries over to the recipient and will be taxable when the recipient eventually sells.
This is the key distinction from inherited assets, which receive a step-up in basis to fair market value at death. A gift while alive does not carry the same tax advantage: if you give $500,000 worth of stock you purchased for $10,000, the recipient's basis is $10,000, not $500,000. When they sell, they will owe capital gains tax on $490,000 of gain, just as you would have.
There is an important exception for loss property — assets worth less than the donor's basis at the time of the gift. The basis rules for gifted loss property are bifurcated: if the recipient later sells the asset for less than its fair market value on the gift date (a loss), the basis for calculating the loss is the lower of the donor's basis or the fair market value on the gift date. If the recipient sells for more than the donor's basis (a gain), the donor's full basis carries over. This prevents taxpayers from shifting unrealized losses to family members in lower tax brackets who could then harvest those losses more tax-efficiently.
From a gift tax perspective, the annual gift tax exclusion for 2025 is $19,000 per donor per recipient. Gifts below this threshold require no gift tax return. Gifts above the annual exclusion require filing Form 709, and amounts above the exclusion draw down the donor's lifetime exemption (which is $13.99 million in 2025, scheduled to revert significantly in 2026 unless legislation intervenes).
For families with highly appreciated assets, carryover basis means that gifting securities to adult children who are in the 0% capital gains bracket can be an effective strategy — the recipient can sell the gifted shares and pay no federal capital gains tax if their income is below the threshold. However, the 'kiddie tax' rules may apply to children under 19 (or under 24 if full-time students), taxing their unearned income at the parents' rate.