Income tax on off-market credit transactions works like this: when securities change hands outside a public exchange, no broker issues a Form 1099-B, so the person who eventually sells the shares is responsible for tracking cost basis, determining the holding period, calculating the gain, and reporting it on Form 8949 and Schedule D. The tax owed depends heavily on how the shares were acquired. Gifts, inheritances, private purchases, and restricted employer stock each follow different rules, and getting any of them wrong tends to be expensive.
An off-market transaction is any transfer of securities that doesn’t flow through a recognized stock exchange. That covers gifts of stock to family members, inherited shares from a decedent’s estate, private sales of stock in a closely held company, employer-granted restricted stock and options, and transfers between accounts you already own. The IRS treats each type differently, and the tax consequences depend on how you got the shares, what was paid for them, and how long you held them before selling.
Cost Basis Depends on How You Got the Shares
Cost basis is the starting point for every gain or loss calculation, and this is where off-market transfers diverge sharply from a routine brokerage purchase.
Gifted Stock: Carryover Basis
When you receive stock as a gift, your basis is generally what the donor originally paid.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust If your uncle bought 500 shares at $20 and gave them to you when they were worth $80, your basis stays at $20. Sell at $100 and your taxable gain is $80 a share, not $20.
There’s a wrinkle when the fair market value on the gift date is lower than the donor’s basis. In that case, you use the donor’s basis to figure a gain but the lower fair market value to figure a loss.2Internal Revenue Service. Publication 551 (12/2025), Basis of Assets If neither number produces a gain or a loss, the result is zero. This dual-basis rule catches people who assume they can claim a paper loss based on what the donor paid.
If the donor paid federal gift tax on the transfer, a portion of that tax can increase your basis, though the adjustment can’t push basis above fair market value on the gift date.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
Inherited Stock: Stepped-Up Basis
Inherited shares get much more favorable treatment. Your basis is the fair market value on the date the original owner died, regardless of what they paid.3Internal Revenue Service. Gifts and Inheritances Grandmother bought at $5 decades ago, shares worth $150 on her date of death: your basis is $150. All the lifetime appreciation is erased for income tax purposes.
If you receive a Schedule A to Form 8971 from the executor, your reported basis has to match the estate tax value. Reporting a higher basis than what the estate reported is specifically flagged as grounds for an accuracy-related penalty.3Internal Revenue Service. Gifts and Inheritances
Private Purchases
Buy shares directly from another person and your basis is simply what you paid, plus any transaction costs. Straightforward, but document it, because no broker is capturing the price for you.
How Long You Held the Shares Sets the Rate
Whether your gain qualifies for long-term capital gains rates or gets taxed as ordinary income turns on whether you held the shares more than one year. Long-term gains are taxed at 0%, 15%, or 20% depending on your taxable income. Short-term gains are folded into your ordinary income and taxed at your marginal rate, which for 2026 tops out at 37%.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The gap is real. A $50,000 gain on stock held 11 months could cost $18,500 at the top ordinary rate. The same gain after 13 months might be taxed at 15% or 20%. So the holding-period start date matters, and for off-market transfers it isn’t always obvious.
Gifted shares let you tack the donor’s holding period onto your own.5Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property Donor held for nine months, you hold for four more, and the combined period is 13 months, qualifying for long-term rates. Tacking applies only when your basis is determined by the donor’s basis. If the dual-basis rule forces you to use fair market value instead, tacking doesn’t apply and your clock starts on the gift date.
Inherited shares are always treated as long-term, no matter how briefly the decedent actually owned them. Even if the shares were bought the day before death, the heir’s sale qualifies for long-term rates.
Private purchases follow the ordinary rule: the holding period starts the day after you buy.
The 3.8% Surtax on High Earners
Capital gains from off-market sales count as net investment income for purposes of the 3.8% net investment income tax. The surtax kicks in when modified adjusted gross income exceeds $200,000 for single filers, $250,000 for joint filers, or $125,000 for married filing separately.6Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax It applies to the lesser of your net investment income or the excess over the threshold. Those thresholds aren’t indexed for inflation.
The 30-Day Section 83(b) Deadline for Restricted Stock
Restricted stock from an employer is one of the most common off-market transfers, and it comes with a deadline that’s easy to miss. By default, restricted stock is taxed as ordinary income when it vests, at the fair market value on the vesting date. If the shares appreciate between grant and vesting, you’re taxed on gains you had no control over.
A Section 83(b) election lets you pay tax on the value at the grant date instead. If the stock is worth very little at grant and you expect substantial appreciation, filing the election can convert future gain from ordinary income into capital gain. The catch is the filing window: you have 30 days from the transfer date to file with the IRS.7Internal Revenue Service. Section 83(b) Election No extensions. If the stock later becomes worthless or you forfeit the shares, you don’t recover the tax already paid. The election is irrevocable.
Wash Sales Reach Into Private Trades
The wash sale rule disallows a loss when you buy substantially identical securities within 30 days before or after selling at a loss.8Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities A common assumption is that the rule only reaches exchange trades. It doesn’t. The statute covers any acquisition of substantially identical stock, so a private repurchase from a friend, an off-market acquisition through a transfer agent, or a purchase in a separate brokerage account all count.
When a wash sale applies, the disallowed loss is added to the basis of the replacement shares, deferring the loss rather than erasing it. In private transactions where no broker adjusts your basis automatically, tracking that adjustment falls to you.
Gift Tax Reporting for the Donor
Giving stock away creates a potential filing obligation for the donor even when no tax is owed. For 2026, the annual gift tax exclusion is $19,000 per recipient, and married couples electing gift splitting can exclude up to $38,000 combined.9Internal Revenue Service. Frequently Asked Questions on Gift Taxes
Gifts above the annual exclusion don’t automatically produce tax owed. They reduce the donor’s lifetime unified credit, which for 2026 is $15,000,000 per person after the changes made by the One, Big, Beautiful Bill signed into law in July 2025.10Internal Revenue Service. What’s New – Estate and Gift Tax But the donor still has to file Form 709 to report any gift above the annual exclusion. Failing to adequately disclose a transfer on Form 709 leaves the IRS’s assessment period on that gift open indefinitely.11Internal Revenue Service. Instructions for Form 709
The gift’s value on Form 709 is the fair market value on the transfer date. For publicly traded stock that’s easy. For privately held shares, a formal valuation may be needed, and the IRS can challenge a figure it considers unreasonable.
Reporting the Sale
Because no broker sends a 1099-B, reporting flows through Form 8949, then Schedule D, then Form 1040. Every gain or loss from an off-market sale goes on Form 8949, and you check Box C for short-term or Box F for long-term transactions at the top of the form since no 1099-B was issued.12Internal Revenue Service. Instructions for Form 8949 For each transaction, list the property description, acquisition date, sale date, proceeds, and basis, plus any adjustments such as a wash sale disallowance.
Totals carry to Schedule D, which nets your gains and losses for the year.13Internal Revenue Service. Instructions for Schedule D (Form 1040) A net capital loss can offset up to $3,000 of ordinary income ($1,500 if married filing separately), with the balance carried forward.
If you’ve acquired the same stock in different lots at different prices, specific identification lets you choose which shares you’re selling. You have to identify the specific lot to the broker or transfer agent at the time of sale. Without adequate identification, the IRS defaults to first-in, first-out, treating the oldest shares as sold first.14Internal Revenue Service. Stocks (Options, Splits, Traders) For off-market holdings built up through gifts, private buys, and vesting events, picking the highest-basis lot can meaningfully cut the tax on a partial sale.
Records You Need to Keep
Without a broker tracking basis and holding period for you, the burden lies entirely on you. The IRS requires taxpayers to keep records identifying the basis of every capital asset.14Internal Revenue Service. Stocks (Options, Splits, Traders)
For gifted securities, keep documentation of the donor’s original purchase price, the donor’s acquisition date, and the fair market value on the gift date. A signed gift letter or deed of gift covering all three is the cleanest option. Without one, you may have to reconstruct the donor’s basis from old brokerage statements or historical price records.
For inherited securities, keep a copy of the estate’s inventory showing the date-of-death valuation, any Form 8971 or Schedule A the executor provides, and probate records establishing the date of death.
For private purchases, keep the purchase agreement, proof of payment (bank statements, canceled checks), and any correspondence establishing the terms.
If you can’t substantiate your basis during an audit, the IRS can treat basis as zero, making 100% of the proceeds taxable. Building the file at the time of the transfer is much cheaper than reconstructing it years later.
What Underreporting Costs
Underpaying tax on an off-market sale exposes you to layered costs. The failure-to-pay penalty runs 0.5% of the unpaid tax per month, capped at 25%.15Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges Interest is charged on top. For 2026, the underpayment interest rate for individuals is 7% for the first quarter and 6% for the second, compounded daily, and the rate resets each quarter based on the federal short-term rate.16Internal Revenue Service. Quarterly Interest Rates
An accuracy-related penalty of 20% of the underpayment can apply if the IRS finds a substantial understatement or negligence. Reporting a basis higher than the estate tax value on inherited property is specifically identified as grounds for this penalty.3Internal Revenue Service. Gifts and Inheritances Between the penalties and the interest, an underpayment can grow by 30% or more within the first year alone, which is why getting the numbers right on the original return is always cheaper than fixing them later.