Basis on Sale of Gifted Stock

Tom gave his son, David, a birthday present of Big M stock with a fair market value of $50,000. Tom paid gift tax of $9,700 as Tom had previously given David earlier this year a cash gift. Tom’s adjusted basis in the stock on the date of the gift was $30,000. Three months later, David sold the stock for $75,000. What was David’s basis on the date of sale of the stock?

$20,000
$27,020
$31,700
$50,000

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B is the answer. The gift tax paid on the gift is an adjustment to basis to the extent the gift tax is paid on the appreciation of the asset. In this case, the stock appreciated from $30,000 to $50,000 or a total of $20,000. The appreciation is divided by the total fair market value of the gift to arrive at the portion of the gift that is appreciation: $20,000/$50,000 = 2/5. This fraction is multiplied by the amount of gift tax paid: 2/5 x $9,700 = $1,940. This adjustment to basis will then increase the basis of the stock from Tom’s original basis of $30,000 to $31,940.

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