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Intermediate

Stocks as gifts: The gift that keeps on giving

Highlights:

- The gift of stock can help someone build wealth while also allowing them to sell it if they need cash.

- Gift stocks allow you to transfer shares of stocks (and any capital gains) to loved ones without having to pay capital gains taxes. If the recipient later sells those shares, they will have to pay taxes on the capital gains, which would include the difference between the original cost basis or the purchase price and the selling price.

- Custodial and brokerage accounts are making it easier than ever to gift shares of stock.

In the endless sea of gift ideas, cash seems like a reasonable choice if you’re not sure what to buy someone. But it’s not the only financial option. Giving stocks as gifts has become an excellent alternative that builds wealth for someone’s future while keeping them in mind for birthdays, graduations, the holiday season, or other special occasions.

Rather than gifting the mundane this year — like a fruitcake or a pair of socks — give the gift of a stock investment. If you’re new to the idea, this guide will help you navigate the ins and outs of how to gift stock. Spoiler alert: It’s easier than you might think.

The benefits of stocks as gifts for the recipient

Before you give stocks to a loved one, you should understand why it’s a great gift. Yes, it’s a way to give cash that’s not immediately spent, but it’s also full of other benefits.

The gift of financial literacy

The obvious advantage of gifting stock — especially for children, teens, and the uninitiated investor or family member — is that you can teach the basics of wealth management, financial literacy, and personal finance. While savings accounts have their place in money management, the stock market is one of the best ways to build wealth.

A low-cost gift that can create value

Cash or gift cards are stagnant investments for the most part. Sure, they carry cash value, but some can actually lose value over time. And that’s just what stocks as gifts can do.

Imagine if you bought stocks at a $1,000 cost basis that could grow to $7,000 or more in 20 years. That’s essentially gifting money toward a new car or a down payment for a house.

That doesn’t mean you need to plop down a grand. But just the idea of a stockpile of money years into the future makes stocks as gifts a no-brainer compared to (or in addition to!) toys that kids will outgrow or fad items.

The advantages of gifting stocks for the giver

Stocks as gifts: little girl happily opening a gift with her grandmother

Even if you support the idea that it’s better to give than to receive, gifting stocks also provides the giver with several benefits and advantages. Unlike other gifts, you aren’t just out the money – you get something in return. It’s not that the gift of giving doesn’t provide a sense of fulfillment. But it's a win-win approach when you can give something that also benefits you.

The IRS gift tax and potential tax deductions

When you choose to gift stocks, you can take advantage of tax policies that can reduce your taxable income. As of 2022, the IRS allows you to gift any person — child, spouse, family member, best friend, neighbor, etc. — up to $16,000 a year, including stocks per person. 

The annual exclusion is per recipient and not the sum total of all your gifts. That means that you can give $16,000 to your sister, another $16,000 to a friend, another $16,000 to a child, and so on without having to file a gift tax return for 2022.

However, any amount over $16,000 to a certain individual is subject to the IRS gift tax, which starts at 18% and increases up to 40% based on your income.

A note about capital gains tax

If you want to give a large amount of cash, you may either have to pull it out of your savings or sell stocks through your brokerage firm or investment account. While the latter seems relatively straightforward, the government requires you to pay a capital gains tax on any earnings on the stock. For example, if you bought $10,000 worth of stock and sold it for $15,000, you would have to pay the capital gains tax on the $5,000 you made.

To avoid the long-term capital gains tax — which sits at either 15% or 20% based on your income tax bracket and between 0-13.3% depending on the state where you reside — you can simply gift the stock from your own portfolio or buy it on behalf of your gift recipient.

By gifting the stock, you avoid the need to liquidate the asset and pay taxes. Plus, you’re giving an asset that has the potential to grow more valuable over time than cash.

How to gift stocks

Since everyone wins, gifting any number of shares of stock is a pretty brilliant idea from nearly all perspectives. If you decide that this is what you want to give this year or in the future, here’s how to give stocks as gifts.

Gift stock through your brokerage account

The easiest and most common way to give stocks as gifts is simply through the investment broker you use for your personal account. Some brokers allow you to do this online; others require you to call them. The recipient of the gifted stock shares should already have an existing brokerage account, making it easy for you to transfer your shares to their account.

Open a custodial account

Individuals under the age of 18 aren’t legally allowed to trade stocks or securities. However, the federal government created custodial accounts that will enable you to buy investments for those under 18, whether it’s your child, grandchild, or a loved one.

Although you’re only tax-exempt for gifts of up to $16,000 a year, the person named in the custodial account cannot touch the money until they reach the age of 18. You may also be able to open a trust account if you want to prevent the gift recipient from accessing it at an even later date.

What about the risks?

Stock market information on a mobile phone

If you've decided on the stock market, perhaps the lowest-risk options are exchange-traded funds or ETFs. ETFs are baskets of assets that provide investment diversity and hedge risk in the stock market. These usually track an index such as the Dow, S&P 500, or NASDAQ. Many of these also provide dividends that are reinvested into the account.

Even a single share of stock can come with risk, so a blue-chip ETF or a blue-chip stock — which are established companies with proven reliability and profitability — might be your best option. 

Investing 101: The next best gift to stocks themselves

Stocks as gifts are a unique idea to help build the wealth and portfolio of the ones you love. But teaching them how to invest allows the novice investor to watch their hard work and savings grow — especially if you’re a parent who wants to teach wealth management at an early age.

If the knowledge of investing is something that you want to pass along to your kids, Greenlight’s investing app for kids helps them to learn to do so at a young age. Kids and teens can propose trades, like requests to purchase fractional shares, and research new investments. All from their app.

Learn more about how Greenlight® can help teach kids about investing by signing up today!

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