Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

How is the basis determined for the recipient of gifted securities?

1. The same as the donor's basis

2. Market value at the time of gifting

3. The original cost by donor

4. Zero, since they are gifts

The correct answer is: The same as the donor's basis

The basis for the recipient of gifted securities is determined by using the same basis as the donor's basis. This means that when an individual receives a gift of securities, their basis in those securities is equal to what the donor's basis was prior to the gift. This approach is known as "carryover basis." This rule is essential for calculating any future capital gains or losses when the recipient sells the gifted securities. For example, if the donor bought the securities at a low price and then gifted them while their market value had increased, the recipient would still assume the original lower basis. This prevents the taxation of unrealized gains at the time of the gift and ensures that the tax consequences are deferred until the securities are sold. Market value at the time of gifting would typically be used for determining the amount of the gift for gift tax purposes but does not affect the recipient's basis in the assets. The original cost by the donor is essentially the same as the donor's basis, hence reinforcing the same underlying principle. Lastly, saying the basis is zero fails to recognize that the recipient inherits the donor's tax implications associated with the gifted asset.