If you’re looking to give a gift that keeps on giving this holiday season, you might want to consider stocks or other investments. Your loved one likely won’t be disappointed.
A new Yahoo Finance/Ipsos poll revealed that almost 7 in 10 Americans said they would be pleased with an investment as a holiday gift. Just 6% said they would be let down by receiving this type of gift.
Still, an investment as a gift requires some careful planning to avoid any tax missteps and to ensure that the gift provides the benefits the recipient actually needs.
“When an individual receives securities as a gift, the potential growth is hopeful. It might be something more in the future,” said Erika Safran, founder of Safran Wealth Advisors, told Yahoo Finance. “Perhaps if an individual comes from a family or low income earners, chances are that that monetary gift will be put to use, pay a bill, pay off a debt, pay for tuition….But for someone who may not need the money, receiving the securities creates a greater future opportunity.”
Here’s what to know.
What investment to get
Safran recommended that gift givers start by figuring out what investments were best suited to their intended recipients.
Investments like mutual funds and ETFs are less risky because they are diversified, she said, while stocks come with more risk. Some can be big winners; others, not so much.
“One downside,” she said, “you may be giving that appreciated security, which, in turn, may turn out to be a dog.”
Gift givers should be mindful of the gift recipient’s investment experience and financial education, Safran said. Those giving a gift should also explain their stock pick to their recipient.
“Tell the story: why you bought it, why you own it, what it’s done, and how it’s invested,” she said. “And is this something that you feel comfortable holding on to.”
Another consideration, according to Nicholas Weisert, a financial adviser and chief compliance officer at Integra Financial? The recipient’s tax bracket.
“So folks in higher tax brackets, you’re likely going to want to skew towards investments that have lower tax ramifications — your stocks and growth funds, ETFs or mutual funds,” he said. “And folks in lower tax brackets, you’d probably prefer them to receive the things that are interest bearing or paying a dividend.”
Tax implications of investment gifts
Taxes can make buying an investment gift a little more complicated than purchasing a gift card.
The first thing to know is that the maximum amount a gift giver can give another person — aside from a spouse — in the 2023 calendar year without reporting it to the IRS is $17,000. Past that point, the gift giver will likely have to fill out tax Form 709 to report the gift.
That doesn’t mean the gift is taxed, though, experts are quick to point out.
“Many confuse the annual gift tax limit of $17,000 as a maximum gift and believe amounts above that are taxable,” Safran said. “Though the annual gift tax exclusion is $17,000 per giver to one recipient, it does not mean that amounts above that are taxed. All it means is that this is the maximum amount you can give to one person without filing a tax form to inform the IRS.”
Gifts above $17,000 also count against the gift giver’s lifetime gift exemption. For 2023, gift givers can give a maximum lifetime amount of $12.92 million in cash or other assets to one person before the federal gift tax comes into play. So, that’s a lot of wiggle room.
Another tax consideration is the cost basis of the investment, Safran said.
In a hypothetical, she explained that if the original investment was $10,000 and is now worth $50,000, the gift recipient now owns $50,000 in stock. That gifted stock is also treated as if the recipient bought the stock on the same date as the original owner. So if the recipient then sells the stock immediately, they will need to pay capital gains tax on the $40,000 gain.
But whether it is taxed as a long-term or short-term gain depends on when the original owner purchased the stock. If the original owner held it for more than one year, the recipient will pay long-term capital gains tax. But if the owner held the security for less than a year, then the gains are taxed as ordinary income. In general, long-term capital gain taxes are lower than ordinary income, so it’s better for the gift recipient to hold the investment gift longer.
The gift giver may also want to think about the best tax situation for them. Selling a stock first and giving the cash instead to the recipient may make more sense if the value of the stock has gone down since originally purchased. That’s because the gift giver can realize a capital loss that can be used to offset any other capital gains that tax year. If the giver doesn’t have any gains to offset, they can use the loss to deduct against ordinary income, up to $3,000 per tax year.
How to go about making an investment gift
Once investors have selected the right investment for the recipient and know the tax implications, the most straightforward way to transfer the asset from the owner’s account to the gift recipient is via a brokerage firm. Typically the owner of the securities signs a document by hand or using DocuSign to transfer the assets.
“That’s the easiest way of doing it. There are other more complicated ways,” Safran said. “You can also transfer it to someone who owns an account at another brokerage firm. But it’s a different process. So maybe the bulk of it is yes, you can transfer securities to any brokerage firm. The easiest is though is if the recipient already has an account.”
Dylan Croll is a Yahoo Finance reporter.
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