When you give stock to your child, their cost basis is generally the same as yours. This carryover basis rule means your original purchase price — adjusted for things like splits and reinvested dividends — follows the shares into your child’s hands, and any appreciation that built up while you owned the stock will be taxed to your child when they sell. Two situations change the picture: the stock has lost value since you bought it, or you actually paid federal gift tax on the transfer.
The Carryover Basis Rule
Property received as a gift takes the same basis the donor had, or the basis of the last owner who didn’t receive it as a gift.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust If you bought 100 shares at $50, your child’s basis is $50 per share, no matter what the stock trades for on the day you transfer it. This carryover applies whenever the stock’s fair market value on the date of the gift is equal to or greater than your adjusted basis.
The word “adjusted” carries weight. Your original purchase price is only the starting point. Stock splits, reinvested dividends, and return-of-capital distributions all shift the basis over the years you held the shares. What your child needs is the final adjusted figure, not the number printed on your old trade confirmation.
When the Stock Has Lost Value
A different rule applies when the stock is worth less on the gift date than you paid for it. Congress didn’t want donors handing unrealized losses to family members, so the law splits the basis in two depending on how the child eventually sells.
For calculating a gain, your child uses your original adjusted basis. For calculating a loss, your child uses the fair market value on the date of the gift, whichever is lower.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust The child can’t claim a loss that reflects depreciation that happened on your watch.
This creates a dead zone. If your child sells for more than the gift-date value but less than your original basis, there’s neither a gain nor a loss. Say you paid $40 per share, the stock was worth $25 when you gifted it, and your child sells at $32. No taxable gain, because $32 is below your $40 basis. No deductible loss, because $32 is above the $25 fair market value on the gift date. The sale is simply tax-neutral.
The practical takeaway: don’t gift depreciated stock. Sell it yourself, claim the capital loss on your own return, and gift the cash. Handing over the shares wastes the loss entirely.
Basis Adjustment When You Actually Pay Gift Tax
If your gift is large enough that you owe federal gift tax (not merely file a return), part of that tax can increase your child’s basis. For gifts made after 1976, the increase is limited to the share of gift tax attributable to the stock’s net appreciation — the difference between the gift-date fair market value and your adjusted basis.1Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
The formula: divide the net appreciation by the total value of the gift, then multiply by the gift tax paid. Gift stock worth $90,000 with a $60,000 basis, and pay $33,300 in gift tax, and the basis increase is ($30,000 ÷ $90,000) × $33,300 = $11,100. Your child’s new basis becomes $71,100.2eCFR. 26 CFR 1.1015-5 – Increased Basis for Gift Tax Paid
The adjustment can’t push basis above the gift-date fair market value. Most donors never trigger this rule because the lifetime gift and estate exemption is so large — $15 million for 2026 under the One, Big, Beautiful Bill Act signed on July 4, 2025.3Internal Revenue Service. What’s New – Estate and Gift Tax Filing Form 709 for a gift above the annual exclusion isn’t the same as paying tax; the return simply runs a tally against that exemption. No paid gift tax, no basis bump.
The Holding Period Comes With the Basis
Basis isn’t the only thing that carries over. Your holding period does too. If you held the shares for three years before the gift, your child is treated as having held them for three years plus whatever additional time passes before the sale.4Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property Your child can qualify for long-term capital gains rates the day after receiving the stock, as long as you held it for more than a year.
One exception: if the dual basis rule applies and your child ends up using the gift-date fair market value as the loss basis, the holding period starts the day after the gift. Tacking only works when your child’s basis matches yours.
What Your Child Owes When They Sell
The math at sale is sale price minus the determined cost basis. If the combined holding period runs over a year, the gain is long-term and taxed at preferential capital gains rates.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses A year or less, and it’s short-term, taxed at ordinary income rates that can reach 37%. High-income sellers may also owe the 3.8% net investment income tax.6Internal Revenue Service. Topic No. 559, Net Investment Income Tax
If your child is young, a second layer applies. The kiddie tax covers children under 19, or under 24 if they’re full-time students who don’t provide more than half their own support. For 2026, the first $1,350 of a child’s unearned income is tax-free, the next $1,350 is taxed at the child’s own rate, and anything above $2,700 is taxed at the parents’ marginal rate.7Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax) A $10,000 gain on gifted stock sold by a minor gets most of its tax bill computed at your rate, which erases the bracket advantage many parents assume they’re capturing.
Why Gifting May Be Worse Than Waiting
Inherited stock is treated very differently. When stock passes at death, the basis resets to the fair market value on the date of death — a stepped-up basis that wipes out capital gains tax on all the appreciation during the original owner’s lifetime.8Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
The difference is stark. Stock you bought at $10 and gift when it’s worth $100 leaves your child with a $10 basis and tax on $90 of gain per share. The same stock inherited at $100 leaves your child with a $100 basis and no tax on that appreciation. The tax math clearly favors holding highly appreciated stock until death.
Gifting during your lifetime still has its uses — you see your child benefit, and future appreciation shifts out of your estate. But for shares sitting on decades of gains, the step-up at death is hard to beat. A depreciated position also gets a stepped-down basis at death, so the loss disappears either way; better to realize it yourself while you can.9Internal Revenue Service. Gifts and Inheritances
Records Your Child Will Need
These transactions fall apart in practice when the paperwork isn’t there. Your child has to be able to prove your original purchase date and adjusted cost basis if the IRS ever asks. Without that proof, basis can be treated as zero, and the entire sale price becomes taxable gain.
Pass along the original trade confirmations, records of any reinvested dividends or splits that changed the basis, and the stock’s fair market value on the date of the gift. That last figure matters for the dual basis rule and for any gift-tax basis adjustment. If you filed Form 709, keep a copy with the rest. Your child may not sell for decades, and by then reconstructing this history from scratch is close to impossible.