How does transferring and selling stock affect one's taxes?

January 19, 2011 3:27 PM

Question for a friend living in the US who is wondering about transferring and selling stock and its effect on taxes and tax bracket. His grandparents gave him some stock shares as a gift when he was a child in care of his parents. He would now like to transfer the stock to his own name and sell it to pay for school this year. How will this affect his taxes for the 2011 year?

The amount of stock is significant, approximately $10,000. He is worried about losing financial aid for the 2012-2013 year if the stock goes on his 2011 taxes, as well as any taxes he may incur from selling the stock (is there a way for him to calculate these taxes so he can put this amount away?). However, he needs the money to pay for the Spring and Summer semesters of this year.

Will selling the stock in order to pay for school affect his tax bracket? Would it be better for his parents to sell the stock for him?

posted by Hey nonny nonny mouse to Work & Money (3 answers total)

Your friend will need to find out the cost basis of the stock. My understanding is that since it was gifted to him by his grandparents while they were living, his cost basis is the same as their original cost basis, in other words what they originally paid for it. Unfortunately, if you can't document the cost basis, the IRS makes you use $0 as the cost basis and you have to pay much more taxes.

Taxes are only paid (or credited) based on the difference between the selling price and the cost basis. This difference is called the capital gain (or loss) and the tax rate on capital gains can vary depending on your friend's tax bracket. If he is a student, it is likely his tax bracket is low and he will have a 0% capital gains tax.

Disclaimers: I have no idea how this will affect financial aid. I am not a tax professional and this could be wrong. Use the keywords as a jumping off point.
posted by Durin's Bane at 4:01 PM on January 19, 2011

You'll need to know two things - if have an immediate tax obligation for receiving the stock once it's transferred to you, and how the subsequent selling of that stock will affect you tax-wise (is it capital gains, etc....)
posted by TravellingDen at 5:25 PM on January 19, 2011

It also depends on exactly how this was given to your parents in trust for you.....

find a good tax guy and ask him, seriously.
posted by TravellingDen at 5:26 PM on January 19, 2011