How to calculate FMV for a gift of stock?

What comes to your mind when you think of gifting? Expensive accessories, fancy vacations, or even donations? Stocks, which may increase in value over time, are a better long-term gift than something that will eventually wear out.  Furthermore, you can skip paying capital gains tax on the value increase through gifting instead of selling the stocks for cash.

Gift stocks are gaining popularity because of their tax-efficient way of transferring wealth. But how do you assess the fair market value of the offer or receive? We got that covered for you. This article will explain the importance of FMV and how to calculate the FMV of gift stock in detail.

FMV for the gift of stock

Whether to receive or give a gift stock, knowing its FMV is important as it affects your tax deductions, possible tax obligations, as it affects your tax deductions, potential tax liabilities, and overall financial planning related to the gift stock.

Giving someone a stock as a gift moves ownership of the shares into their brokerage account. You are not obliged to trade the shares before the recipient gets them, but doing this would result in you having to pay additional taxes.

For example, if the FMV is more than the original basis and you received 100 gift stocks when their price was $50, and the other person paid $40 for the stocks when they made the purchase 5 years back, you will use $40 as the base price when selling the stocks.

Though it can be challenging to calculate the FMV of gift stock or other related information needed for tax reasons, with little advanced preparation, the giver and receiver of gift stock can minimize their tax burden.

Determining the FMV of Gift of stock

Finding the FMV of the gift stock requires considering several elements. Knowing these factors will enable you to report accurate FMV, a requirement from a tax standpoint.

Market Availability

In the case of a publicly traded stock, then FMV will be fairly easy to determine. You can use the midpoint between the highest and lowest prices on the day of giving the gift stock. You’ll have the FMV from that average, which in turn provides the cost basis. 

You can get up-to-the-minute prices from reliable sources like stock exchanges, making the process even easier.

No Market Sales

Determining the FMV becomes challenging as private companies do not trade publicly. Therefore, you may have to depend on professional valuation services, book value, earnings, or comparable sales of similar companies.

The FMV has to be valued using the best available information. For closely held and private companies, it is advisable to seek the help of professional valuation experts.

Documentation

Proper and complete documentation is crucial when determining the FMV of stock given as a gift. It should include information about past  purchases, the gift giver’s original cost basis,

If the parties involved use a valuation service, that formal valuation report itself becomes an important document. Proper documentation ensures that IRS regulations are followed and will assist in calculating the capital profit or losses when the recipient eventually sells.

Therefore, considering each of these factors while calculating FMV will not only give the value of the gift stock but also help one to understand possible tax responsibilities.

Cost Basis of Gifted Stock

FMV greater than Donor’s basis: Should the fair market value (FMV) be higher, you basically inherit the original cost basis of the donor. Similar to the above example. If the FMV upon receiving the gift exceeds the cost basis, use the original cost basis when you sell. This is the most common scenario. For example, if someone gives you 100 shares as gift stock, They originally purchased the stock for $50 per share, so the total donor basis is $5000. When you received the gift, the stock’s FMV was $40 per share, which makes total value $4000.

If you sell for a value higher than the donor’s basis, say $60 per share, you should consider the donor’s basis to calculate your gain. 

$60 – $50 = $10 gain per share.

FMV lower than Donor’s basis: Generally, if you receive a gift of stock, your cost basis equals the donor’s initial cost basis unless the fair market value (FMV) was lower on the gift date.

In the same example, let’s say you sell the gift stock for a value more than the FMV ($40) but less than the donor’s basis ($50), which is $45 (between $40 and $50) per share. Your selling price becomes the cost basis; you need not report a gain or loss.

Inherited stock: The kind of stock someone inherits after the original equity holder passes away. From the time the decedent gets until their lifetime, any value increase in the stock is not taxable. Instead, they are liable only for income on capital gains gained during their lifetime; such income will be subject to tax at the long-term capital gains rate.

Considerations for Tax of Gifted Stock

Here are the key considerations on tax for gifted stock:

Capital Gains

• You earn capital gain if you sell the gifted stock on a more-than-cost basis (which might be the stepped-up basis if it was inherited or the donor’s initial cost basis).
• Capital gains are usually classified as either short-term or long-term, depending on how long they are held. Long-term capital gains treatment often applies to stock held for more than a year.

Tax Rates

• Your income level and how long you’ve owned the stock will determine the capital gains tax rate.
• Preferential tax rates, which are frequently lower than short-term capital gains rates, are typically available for long-term capital gains.

Gift Tax Implications

• Usually, there is no immediate tax obligation on the gift recipient.
• If the donor was required to pay gift tax on the transfer, this has no bearing on the recipient’s capital gains tax.

If the recipient needs assistance getting ready for any tax reporting or payment obligations, they should consult with a tax professional.

Calculating FMV for a gift of stock: How to make it simple?

• Valuation service: Gifting stock in a business is a considerate and well-thought-out way to pass on power and assets. However, you need to avoid issues related to gift taxes, estate planning, power dynamics, and the recipient’s tax situation. Eqvista can help you manage the company’s cap table, issue electronic shares and track equity ownership using our comprehensive stock administration system. We also help simplify the company’s stock administration, facilitating share management and transfer.
• Software: Equity management software lets companies easily track and manage everything related to stock. This software helps companies avoid recording incorrect transactions and facilitate accurate FMV calculations with history and backups all stored in one place. One key feature of this software is the FMV calculation of share-based compensation, which depends on several factors such as equity value, discount rates, and volatility. Utilizing equity management software will help you calculate FMV accurately, saving time and resources.
• IRS guidelines and publications: Referring to the latest IRS guidelines is recommended for proper reporting. Reporting to the IRS is mandatory once the FMV is ascertained to avoid fines, penalties, and audits. The transaction must be reported on your income tax return (e.g., Schedule D of Form 1040 in the United States) when you sell the gifted stock.
• Comparative market analysis: For private companies, calculating FMV for gifted stock becomes complex. In that case, a CMA is used. This comparative market analysis compares the company’s stock to other companies within the industry while considering recent earnings, assets, and private sales. The process of CMA requires the services of a professional appraiser who can analyze financial reports, market conditions, and the performance of a company to determine the real FMV. 

How can Eqvista help? 

When calculating FMV for a gift stock, it is important to maintain accuracy as the IRS requires the FMV determination at the date of receiving gift stock. FMV calculation is not an easy process. It requires considering various factors including earnings, book value, or comparing other similar companies, to derive it precisely.

Eqvista provides thorough valuation services, to help companies assess their gift stock value. With advanced tools and experienced professionals, we make sure that valuations are precise, following the IRS guidelines. Our valuation process helps avoid assumptions and simplifies your tax reporting. Want to know how Eqvista can help you further? Contact us today!