Gifting Securities

If you hold securities that have appreciated in value and want to make charitable donations, do not sell the securities. Instead, just give the securities to the charitable organization. If you sell first, you will owe income tax on the capital gain. After paying the tax, you will have less money for the charity. However, the charitable organization can sell the securities and keep all the proceeds because it pays no income tax.

But the situation is different if you give securities to someone other than a charitable organization - like a family member. The recipient of the gift will eventually owe income tax on the capital gain when the securities are sold. The recipient needs to know your cost basis for the securities in order to determine the capital gain. The recipient's cost basis is not zero! The recipient assumes your cost basis.

When the recipient eventually sells the securities, he or she should owe income tax only on the gain in value - not the entire amount of proceeds received from selling. The recipient gets to subtract the cost basis from the sales proceeds to determine the taxable gain. If you do not provide your cost basis to the recipient, then you are sticking him or her with a future tax liability that is larger than it should be.

You did not keep track of your cost basis? Shame on you. In that case, you should just sell the securities and pay tax on the entire sales proceeds - using a zero cost basis. Then, give what's left to your family members. At least this way it will be you overpaying the income tax instead of placing that burden on your family.