The cost basis of gifted stock is generally the donor’s original cost basis — the price they paid, adjusted for things like reinvested dividends and stock splits — not zero and not what the shares were worth on the day you received them. This “transferred basis” rule under IRC Section 1015 means you inherit the donor’s tax position along with the shares.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust A separate, lower basis kicks in only if the stock had already dropped below the donor’s purchase price on the day of the gift. Getting the number right matters because it determines your capital gains tax when you sell.
The General Rule: You Step Into the Donor’s Shoes
If you sell gifted stock at a profit, your basis equals the donor’s adjusted basis. If your uncle paid $50 a share and you sell for $150, your taxable gain is $100 per share, not $150. The full appreciation history carries over to you, back to when the donor originally bought the stock.
That transferred basis is more than just the original purchase price. If the donor acquired additional shares through a dividend reinvestment plan, each reinvested purchase added to the total basis. Adjustments the donor made for stock splits, commissions, or return-of-capital distributions carry over too. Ask the donor or their broker for the full history of the position before you sell, not after.
When Gift Tax Was Paid on the Transfer
If the donor actually paid federal gift tax on the transfer, you can increase your basis by the portion of that tax attributable to the stock’s appreciation. Divide the net appreciation (fair market value at the time of the gift minus the donor’s adjusted basis) by the amount of the gift, then multiply by the gift tax paid.2eCFR. 26 CFR 1.1015-5 – Increased Basis for Gift Tax Paid
An example: donor’s basis was $1,000, fair market value at the gift was $4,000, and the donor paid $300 in gift tax. Net appreciation is $3,000, which is 75% of the $4,000 value. Multiply 75% by $300 and you get a $225 basis increase. Your adjusted basis for figuring a gain would be $1,225.
In practice this rarely applies. The annual gift tax exclusion for 2026 is $19,000 per recipient, and the lifetime gift and estate tax exemption is $15,000,000.3Internal Revenue Service. What’s New — Estate and Gift Tax A donor has to exhaust that entire lifetime exemption before any gift tax is actually owed. Most recipients will use the donor’s straight basis with no adjustment.
When the Stock Had Already Dropped Before the Gift
A different rule applies if the shares were worth less on the gift date than the donor originally paid. Congress did not want donors shifting unrealized losses to someone else, so Section 1015 creates a second, lower basis for calculating losses. When the donor’s adjusted basis exceeds the fair market value on the gift date, you use that lower fair market value as your basis when figuring a loss.
Suppose the donor bought at $100 per share, the stock had fallen to $70 by the gift date, and you later sell for $50. Your recognized loss is only $20 per share ($70 minus $50), not $50. The $30 decline that happened on the donor’s watch drops out of the tax system entirely. Neither of you deducts it.
The No-Gain, No-Loss Zone
This dual basis creates an odd gap. If your sale price lands between the donor’s original basis and the lower gift-date value, you report neither a gain nor a loss. Using the same numbers: donor’s basis $100, gift-date value $70, sale price $85. The gain rule compares $85 to $100 — that’s a loss, so the gain rule doesn’t apply. The loss rule compares $85 to $70 — that’s a gain, so the loss rule doesn’t apply. The result is zero taxable event.4Internal Revenue Service. Publication 551 – Basis of Assets
You need to track three numbers to know which rule applies: the donor’s adjusted basis, the fair market value on the gift date, and your eventual sale price.
Holding Period and the Rate You’ll Pay
Whether your gain or loss is long-term or short-term depends on total holding time. When you use the donor’s basis to figure a gain, you tack on the donor’s entire holding period. If the donor held the stock for three years and you sell a week after receiving the gift, your holding period is three years, and the gain qualifies for the lower long-term rate.5Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
One exception: when the dual basis rule forces you to use the gift-date value to figure a loss, tacking does not apply. Your holding period starts fresh on the gift date. Sell within a year and the loss is short-term.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses Long-term gains are taxed at 0%, 15%, or 20% depending on your taxable income; short-term gains are taxed at ordinary income rates.
Selling Only Some of the Shares
When the donor gave you shares acquired in multiple lots at different prices, each lot keeps its own distinct basis. If you sell only part of the position, you can use specific identification to choose which lots to sell, controlling the tax impact. You must identify the specific shares before the trade settles and get confirmation from your broker. Without that, the default is generally first-in, first-out, which is not always the most tax-efficient outcome.
Reporting the Sale and Fixing Broker Errors
Your brokerage will report the sale on Form 1099-B, and brokers frequently get the basis wrong on gifted shares. The receiving broker often has no record of the donor’s original purchase price and may report the transfer-in value as basis, or leave the field blank. Either way, the 1099-B number may not match your actual basis.
You are responsible for reporting the correct basis, even when it differs from the broker’s number. On Form 8949, use adjustment code “B” to flag that the reported basis is wrong, then enter the correct figure. The corrected gain or loss flows to Schedule D.7Internal Revenue Service. Instructions for Form 8949 (2025)
If the donor filed IRS Form 709 for the transfer, that form documents the gift date and the fair market value used for gift tax purposes and is worth keeping. When the gift fell under the $19,000 annual exclusion and no Form 709 was required, you still need to establish the donor’s basis and the gift-date value on your own.8Internal Revenue Service. Instructions for Form 709 (2025) – General Instructions
What to Do When Records Are Missing
The burden of proving basis falls on you, the recipient. Ideally the donor hands over original brokerage statements showing purchase dates and prices. In reality, gifts sometimes come with little paperwork, especially when the donor bought decades ago or through a now-defunct brokerage.
If you cannot reconstruct the donor’s basis, Section 1015 directs the IRS to try to obtain the facts from the donor or anyone else who would know. If that fails, the IRS will determine basis using the fair market value of the stock on the approximate date the donor originally acquired it. That is not the same as a zero basis, though some taxpayers assume it is. Historical stock price data from financial websites can help you reconstruct an approximate purchase price if you know roughly when the donor bought in.
Getting the basis materially wrong can trigger the accuracy-related penalty of 20% of the tax underpayment. The penalty applies when the understatement exceeds the greater of 10% of the tax that should have been shown on your return or $5,000.9Internal Revenue Service. Accuracy-Related Penalty On a large block with decades of appreciation, even a small basis error can produce a substantial underpayment. Do the homework before you file.
Two Situations Where the Rules Differ
Inherited stock is not gifted stock. Shares received after the owner’s death usually receive a “stepped-up” basis equal to the fair market value on the date of death under IRC Section 1014.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If a parent bought at $10 and the shares were worth $200 at death, the heir’s basis is $200. That is a fundamentally different rule from the transferred basis that governs lifetime gifts.
Transfers between spouses, or to a former spouse incident to divorce, follow IRC Section 1041. No gain or loss is recognized on the transfer, and the receiving spouse takes the transferor’s adjusted basis without the dual basis rule for below-value property.11Office of the Law Revision Counsel. 26 USC 1041 – Transfers of Property Between Spouses or Incident to Divorce A transfer counts as incident to divorce if it occurs within one year after the marriage ends or is otherwise related to the end of the marriage. If your ex bought stock at $20 and transfers it to you in the divorce when it’s worth $80, your basis is $20, and you will owe capital gains tax on the $60 appreciation when you sell.