Gift Versus an Inheritance

Q: If an uncle gives me stock when he dies, will I be taxed on the gains?

- G.B., Grand Rapids, Mich.

A: There's a big difference between a gift and an inheritance (received from someone's estate). With a gift of appreciated stock or property, your basis (or cost, for tax purposes) is the same basis that the person who gave you the gift originally had. So you'll need to attempt to trace the cost all the way back to the person who gave it to you. This can sometimes be difficult.

With an inheritance, you get what is called a "stepped-up" basis. Your basis is the fair market value of the stock on the date of death of the donor. The estate's tax return should disclose the value of the stock at date of death. Alternatively, if you know the date, you can get the stock price online at various sources, or even by calling your broker or the company's investor relations department and asking. Once you determine the value, back up your findings with a letter from the broker or the shareholder relations department. You'll need that information just in case the IRS wants to double-check (read: audit) your tax return.

Q: What do business reporters mean when they refer to "profit-taking"?

- Y.H., Augusta, Ga.

A: When a stock price suddenly jumps up, some investors will decide to sell their shares, taking their profits and moving their proceeds into some other investments. If many investors sell their shares, this will have the effect of depressing the stock's price for a while. So you're likely to hear now and then that such-and-such stock is down due to some profit-taking.

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