Capital Gains on Gift of Stock

One trick to avoid taxes is to give your appreciated stock to a charity.   You can avoid paying the taxes and get the full deduction for the charity contribution.   The charity gets a good deal too since they get more money.   But that only works since the charity has tax free status.

If you gift stock to a friend or someone without tax free status then they will have to pay that tax you're avoiding.

The Motley Fool discusses the Capital Gains on Gifts of Stock.
They say : "A recipient's cost basis (and holding period) for a gift of stock is the same as the donor's."   

The Motley Fool article gives the short answer which is correct when a stock has gains.   It is a little bit more complex and there are a couple more details for situations when the stock is at a loss when it is gifted.  The IRS discusses the cost basis of assets in publication 551.

Stock market value is above cost :

The recipients cost basis is equal to the cost basis of the purchaser.   Example: You buy 10 shares of Apple back in 2005 for $40 and today its trading at $350.   You gift all 10 shares to your cousin.   Your cousin's cost basis is $40.  If your cousin sells the stock today they'd have to pay taxes on the capital gains of $3100 (350-40 x 10shares).

Stock market value is below cost : 

When you sell the stock you pay tax based on either the market value when you got it or the cost basis of the purchaser.   There are 3 situations:
1. If the stock goes down from market value then you use market value.  
2. If the stock goes above the cost basis then you use original cost basis. 
3. If the stock is between market value and original cost basis then there is no tax implication.

Lets say you bought 100 shares of Microsoft stock last spring when it was trading for $31.   Today the stock is at $26.   If you give the stock to your cousin.

If your cousin sells the stock today then they would have a cost basis of $31 and could record a loss of $5 per share.
If the stock goes down $7 dollars to $19 then they use the fair market value of $26 to figure the loss of $7.
If your cousin holds on to the stock and it goes up $7 to $33 and they sell it then they would use your cost basis of $31 for a gain of $2.
If the stock goes up $2 to $28 then they have no gain or loss since its between the fair market value of $26 and the original cost basis of $31.

Bottom Line:  Be careful to consider the tax impact of gifting stocks to individuals.   Generally the recipient will inherit the original cost basis that the gifter paid.