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Let's say U.S. tax resident bought one share of a mutual fund back in 2010 for $100, and it is worth $200 today.

A) If they wanted to gift that share to family today, would they be liable for any gift tax or capital gains tax in 2024?

B) Would gift recipient be liable for any capital gains tax in 2024 (assuming she doesn't liquidate the share)?

C) If gift recipient sells the share in 2026 for $300, is she liable for any capital gains tax? If yes, will the cost basis be $100 or $200?

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At the federal level, up to $18,000 (2024) can be gifted to a person each year without triggering any gift tax reporting. This is the annual exemption amount and is per gifter, per recipient. Above the annual exclusion amount, the gifter must file a Gift Tax Return (Form 709) to report the entire gift. However, the lifetime gift and estate tax exemption is currently $13,610,000, so as long as the total amount of gifts made during life and the estate at death is less than that, no federal gift/estate tax would be owed by the gifter. This limit may be different if generation-skipping tax (GST) is in play (gifts to those considered two or more generations younger than the gifter). Note that the lifetime exemption is expected to decrease to pre-2018 levels in 2026 without any changes to tax law.

The cost basis of gifts given during life is carried over to the recipient, including the holding period for short/long-term gain purposes. In other words, the recipient will retain the same cost basis as the gifter. One exception is if the fair market value of the property is lower than the gifter's original basis. In that case, the asset has a "dual-basis" - the FMV at gifting if ultimately sold at a loss, and the original basis if sold at a gain.

Applying those federal gifting rules to your scenario (there may be state-specific rules in play that impact state taxes):

A) The recipient would not owe taxes simply because of receiving a gift. The gifter would only report the gift if the annual amount given to that particular recipient exceeds $18,000 in 2024, and would only be subject to gift tax if the total amount of lifetime taxable gifts exceeds the lifetime exemption amount.

B) The recipient would be subject to taxes in 2024 to the extent that the mutual fund distributes taxable income. This could be in the form of dividends, interest, or internal capital gains that can be generated even if the recipient doesn't sell (this is because of the tax structure of mutual funds).

C) This answer is based on a 2010 purchase date, $100 original gifter's cost basis, $200 FMV at date of gifting, and $300 sale price in 2026, and assumes no changes to cost basis during that entire period (no reinvested dividends, no internal capital gains/losses, etc.). The seller's cost basis is $100 (carried over from the gifter) and their capital gain is $200 ($300 sale price less $100 basis), which will be taxed according to their total income and capital gains tax bracket(s).

Remember that this only addresses the federal treatment of gifts made during life, and only gifts not subject to GST. Inheritance at death has a different treatment, GST has specific rules, and individual states may impose their own gift/estate tax rules.

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