You generally do not pay capital gains tax at the moment you receive a gift, but capital gains tax on gifts becomes your problem when you sell. That is because a gifted asset arrives with the donor’s original cost basis attached, and any appreciation that built up while the donor owned it becomes taxable to you when the asset is sold.
The Basis You Inherit From the Donor
Your basis in a gifted asset is the same basis the donor had, adjusted for anything that happened before the gift date.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust You step into the donor’s shoes. If your parents bought stock for $10,000 and gave it to you when it was worth $60,000, your basis is still $10,000. Sell it for $65,000, and you owe capital gains tax on $55,000 of profit.
This carryover basis rule applies cleanly whenever the fair market value of the gift equals or exceeds the donor’s adjusted basis at the time of the gift.2Internal Revenue Service. Property (Basis, Sale of Home, etc.) The appreciation that accumulated during the donor’s ownership follows the property to you.
If the donor paid gift tax on the transfer and the gift was made after 1976, you can increase your basis by the portion of that gift tax attributable to the property’s net appreciation, meaning the difference between the fair market value at the time of the gift and the donor’s adjusted basis.3Internal Revenue Service. Publication 551 – Basis of Assets The adjustment cannot push your basis above the gift’s fair market value on the date of the gift.
When the Gift Has Lost Value
A different rule applies when the fair market value on the gift date is lower than the donor’s basis. You end up with two different basis figures, and which one you use depends on whether the eventual sale produces a gain or a loss.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
- For calculating a gain, use the donor’s original adjusted basis.
- For calculating a loss, use the fair market value on the date of the gift.2Internal Revenue Service. Property (Basis, Sale of Home, etc.)
Say your uncle bought stock for $1,000 and gifted it to you when it was worth $800. Sell it for $1,200 and you use the $1,000 donor basis to report a $200 gain. Sell it for $700 and you use the $800 fair market value to report a $100 loss. The $200 drop that happened while your uncle held the stock is not deductible by anyone.
A third outcome exists when the sale price lands between those two numbers. Selling for $900 in the example above produces neither a gain nor a loss, because $900 is below the $1,000 donor basis and above the $800 fair market value. That middle zone has no capital gains consequence at all.
If you do recognize a capital loss, it can offset only up to $3,000 of ordinary income per year, or $1,500 if you are married filing separately. Anything left over carries forward to future tax years.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Holding Period and Tacking
Short-term gains, from assets held one year or less, are taxed at your ordinary income rates. Long-term gains, from assets held more than one year, get lower preferential rates.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses
When you use the donor’s carryover basis, you also get to add the donor’s holding period to your own. If the donor held the stock for two years and you held it for three months before selling, your holding period is two years and three months, and any gain qualifies as long-term.5Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property This tacking applies whenever your basis is determined by reference to the donor’s basis.
If the dual basis rule forces you to use the lower fair market value to calculate a loss, tacking does not apply. Your holding period starts on the date you received the gift, and a loss from a short holding period is a short-term capital loss, which nets differently against your other gains.
What Rate You Will Pay
Long-term capital gains on gifted property are taxed at 0%, 15%, or 20% depending on your taxable income. For 2026, the 0% rate applies to taxable income up to $49,450 for single filers and $98,900 for married couples filing jointly. The 15% rate covers income above those thresholds up to $545,500 for single filers and $613,700 for married couples filing jointly. Income above those levels is taxed at 20%.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Because the rate depends on the seller’s income, gifts of appreciated property can shift the eventual tax bill. A parent in the 20% bracket who gifts stock to an adult child with modest income can see that same gain taxed at 0% or 15% when the child sells.
Higher earners face an additional 3.8% Net Investment Income Tax on top of the regular rate. It applies to the lesser of your net investment income, which includes capital gains, or the amount by which your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.6Internal Revenue Service. Net Investment Income Tax Those thresholds are not inflation-adjusted. At the top, the effective federal rate on a gain from gifted property can reach 23.8%.
Does the Donor Owe Anything?
Giving away an appreciated asset does not trigger capital gains tax for the donor. A gift is not a sale, the donor never realizes the appreciation, and no taxable event occurs. The built-in gain simply travels to the recipient through the carryover basis.
Gift tax is a separate system. For 2026, the first $19,000 given to any one person is excluded from gift tax entirely.7Internal Revenue Service. Revenue Procedure 2025-32 Married couples can combine their exclusions for $38,000 per recipient with no filing requirement. Gifts above the annual exclusion must be reported on IRS Form 709, but reporting does not necessarily mean tax is owed.8Internal Revenue Service. Frequently Asked Questions on Gift Taxes Amounts above the annual exclusion reduce the donor’s lifetime estate and gift tax exemption, which for 2026 is $15 million per individual.9Internal Revenue Service. What’s New – Estate and Gift Tax
Why Inheriting Is Usually Better Than Being Gifted
This comparison changes the math on family transfers and is worth understanding before anyone signs anything over. Inherited property receives a stepped-up basis equal to its fair market value on the date of the owner’s death.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent That step-up wipes out all capital gains tax on appreciation that occurred during the decedent’s lifetime.
Take stock purchased for $10,000 that is worth $500,000 when the owner dies. An heir who inherits it gets a $500,000 basis and can sell immediately with zero capital gains tax.11Internal Revenue Service. Gifts and Inheritances If the same stock had been gifted during the owner’s lifetime, the recipient would inherit the $10,000 carryover basis and face up to $490,000 in taxable gain when selling.
Inherited property also automatically qualifies for long-term capital gains treatment no matter how briefly the decedent or the heir held it.
The step-up works in reverse for depreciated property. If an asset has lost value by the date of death, the heir’s basis steps down to the lower fair market value, eliminating any deductible loss. Assets that have declined are generally better candidates for gifting during life, where the dual basis rule at least preserves some loss recognition, or for the owner to sell outright and claim the loss on their own return.
The practical takeaway: highly appreciated assets are almost always better left in the estate. Gifting makes more sense for assets with little appreciation, for assets likely to appreciate significantly in the future (moving that post-gift growth out of the taxable estate), or for gifts to a recipient in a low enough bracket to hit the 0% capital gains rate.
Records You Need From the Donor
Recipients run into trouble here years later. To calculate your gain when you sell, you need the donor’s adjusted basis, the fair market value on the date of the gift, the date the donor originally acquired the property, and the amount of any gift tax paid on the transfer. The tax code places the obligation on the donor to provide these records to the recipient at the time of the gift.3Internal Revenue Service. Publication 551 – Basis of Assets
In practice, many donors never hand over the paperwork, and recipients do not think to ask until they are ready to sell. If the donor has died or lost records by then, reconstructing basis is difficult and expensive. When the IRS cannot determine original basis, it may be treated as zero, meaning the entire sale price becomes taxable gain. Ask for the records now, even if a sale is nowhere in your plans.
Reporting the Sale
When you sell gifted property, report the transaction on Form 8949, which lists the asset, dates acquired and sold, proceeds, and your adjusted basis.12Internal Revenue Service. Instructions for Form 8949 The totals flow to Schedule D of your Form 1040, which computes your overall capital gain or loss for the year. For the acquisition date, use the date the donor originally acquired the property if you are using the carryover basis; use the date you received the gift if you are using the fair market value basis under the dual basis rule. Getting that date wrong can misclassify a long-term gain as short-term and cost you the preferential rate.