Give stock to your kids now or leave it to them? The tax math
Gifted shares keep your old cost basis; inherited shares get a new one at death. On $300,000 of stock bought for $60,000: $52,750 of tax, or $0 on a prompt sale.
On this page 4 sections
Stock you give away during your life keeps your original cost basis, so your child inherits your unrealized gain along with the shares. Stock left at death takes a new basis equal to its market value on the date of death, so the gain built up during your life is never taxed as income. On $300,000 of shares bought for $60,000, a child who receives them as a gift and sells owes $52,750 of federal and state tax in 2026; the same child selling inherited shares right away owes $0. Federal estate tax only starts above $15,000,000 per person in 2026, so for most families the basis rule, not the estate tax, is the number that matters.
The numbers
The inputs: shares worth $300,000 with a cost basis of $60,000, a $240,000 long-term gain. The child is single with $85,000 of other income after adjustments and pays a flat 5% state tax. The parents file jointly, are both over 65 and have $90,000 of ordinary income, with the same 5% state rate. Each row is a sale of all the shares in one year, priced by MoneyVibe's capital gains engine on 2026 federal rules (Rev. Proc. 2025-32 brackets, the 3.8% net investment income tax) plus the flat state rate.
| Who sells, and how the shares arrived | Gain taxed | Tax on the sale |
|---|---|---|
| Child sells shares inherited at $300,000 | $0 | $0 |
| Parents sell, then give the cash | $240,000 | $45,820 |
| Child sells shares received as a gift | $240,000 | $52,750 |
The child's $52,750 is $36,000 of federal income tax (the whole gain at 15%), $4,750 of net investment income tax (the sale lifts income past the $200,000 single threshold) and $12,000 of state tax. The parents pay less on the same gain, $45,820, because $44,400 of it fits in their 0% capital gains band; the rest is $30,780 of federal tax, $3,040 of net investment income tax and $12,000 of state tax.
Inherited shares are not tax-free forever. Only the gain up to the date of death disappears. If the shares rise to $320,000 after death and the child then sells, the $20,000 of new gain costs the child $4,000 ($3,000 federal, $1,000 state), on the same inputs.
The estate tax side, from MoneyVibe's estate tax engine (2026 basic exclusion, 40% above it; debts, charity and state taxes set to zero):
| Estate at death | Federal estate tax |
|---|---|
| $2,000,000, one person | $0 |
| $15,000,000, one person | $0 |
| $20,000,000, surviving spouse with the first spouse's unused exclusion | $0 |
| $20,000,000, one person | $2,000,000 |
| $20,000,000, one person who made $1,000,000 of taxable gifts in life | $2,400,000 |
Why it works this way
Gifts carry the giver's basis. IRS Publication 551 says that when a gift's market value is equal to or more than the donor's adjusted basis, "your basis is the donor's adjusted basis at the time you received the gift." The IRS gift tax FAQ gives the same rule with shares bought at $10 and sold at $100: the recipient pays tax on $90 a share. The holding period carries over too (Publication 550), so gifted shares held long enough by the parent are long-term in the child's hands.
Inheritance resets the basis. Publication 551 says the basis of property inherited from a decedent is generally its fair market value on the date of death, or, if the executor elects it, on an alternate valuation date (see the Form 706 instructions) (Internal Revenue Code section 1014). Because the rule is the value at death, it generally works in both directions: shares worth less than their cost at death take the lower value, and the unrealized loss does not pass to the heir. Publication 550 adds that a sale of inherited property is long-term "regardless of how long you held the property." Publication 559 notes that the person receiving a bequest generally pays no income tax on its value.
The estate tax line is high. The IRS "What's new: estate and gift tax" page (updated 23 July 2026) lists a basic exclusion of $15,000,000 for deaths in 2026, set by Public Law 119-21, and an annual gift exclusion of $19,000 per recipient. Gifts and estates share one exclusion: Publication 559 explains that the applicable credit used against gift tax in one year reduces what is left for later gifts or the estate. A married couple can carry the first spouse's unused exclusion to the survivor through the portability election on a Form 706 filed for the first spouse's estate.
A large gift is a paperwork event, not usually a tax bill. Giving $300,000 of shares to one child in 2026 is $281,000 over the $19,000 annual exclusion, so the giver files Form 709. Gift tax is due only once lifetime taxable gifts alone pass the exclusion; at death, those gifts are added to the estate to test it against the same exclusion.
What changes the answer
- Retirement accounts get no step-up. A traditional IRA or 401(k) left to a child is income in respect of a decedent (Publication 559): withdrawals are taxed as ordinary income to the heir. The step-up applies to taxable brokerage accounts, real estate and similar property, not to pre-tax retirement money.
- Who sells, and when. The heir's own income sets the rate. Spreading the gifted sale above over four years at $60,000 of gain a year keeps the child under the net investment income tax threshold: $12,000 a year, $48,000 in total if income, the share price and 2026 rules stay the same, $4,750 less than one sale. A parent with room in the 0% band, as in the table, pays less than a child in a higher bracket would.
- Married couples and how the shares are titled. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) Publication 551 says the whole community property generally gets a new basis when either spouse dies, not just the half that was the decedent's. Elsewhere, for spouses who are the only joint tenants with right of survivorship, or tenants by the entirety (a qualified joint interest), only the half included in the first spouse's estate gets a new basis; the survivor's own half keeps its cost.
- Exceptions that remove the step-up or add a tax. Appreciated property given to someone who dies within one year and comes back to the giver (or the giver's spouse) keeps the old basis (Publication 551). Gifts to a child under 18, an 18-year-old, or a full-time student aged 19 to 23 (the last two only if their earned income is not more than half their support) can fall under the kiddie tax, under which the child's unearned income above $2,700 (IRS Topic 553 as read today) is taxed on Form 8615 rather than at the child's own rates alone. A gift of shares worth less than the giver paid follows a separate loss rule in Publication 551.
What to do first
- List each taxable holding with its cost basis and today's value. The gap is the gain a gift passes on and an inheritance clears.
- Price the sale for the person who would sell it: the capital gains calculator takes the filing status, other income, deductions and a state rate and shows the tax and how much fits at 0%.
- Check whether the estate is anywhere near the line with the estate tax calculator, which adds prior taxable gifts and a spouse's unused exclusion. If it is far below the line, the basis math above favours keeping low-basis shares (not shares below their cost) until death and giving cash or high-basis shares during life; that is the conversation to have with an estate attorney or CPA.
The tools do not model state estate or inheritance taxes, trusts, valuation discounts, the alternate valuation date, the kiddie tax or a change in the law before a death. The full rules are in the library chapters on titling, ownership and the step-up and gifts, estate tax and passing wealth across generations, with the glossary entries for step-up in basis and the estate tax exemption.
Not tax or legal advice. Federal rules as published by the IRS and read on 4 October 2026; state rules differ.