Sale of "non-covered" and "covered" mutual fund shares received as gift

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Matahari
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Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by Matahari »

My question concerns the reporting of the sale of mutual fund shares received as a gift, for which carryover basis applies.

The gifted shares consist of:

(1) "non-covered" shares purchased prior to 2012 and
(2) "covered" shares purchased by way of reinvested dividends since 2012

I understand that when the transaction is reported on Form 8949, I will need to list separately:

(1) "non-covered" shares (for which basis is not reported to the IRS) by checking BOX E
(2) "covered" shares (for which basis is reported to the IRS) by checking BOX D

Does that fact that these were gifted shares impose any additional reporting or related concerns?

I have good records predating the gift relating to the acquisition of all shares, which will establish the cost and carryover basis for all shares. So, calculation of the long-term capital gain and, if any, short-term capital gain is not a concern.

Thank you in advance for your responses.
lazynovice
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Re: Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by lazynovice »

No. Having all the information makes a big difference.
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grabiner
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Re: Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by grabiner »

The only special rule is the prohibition against gifting a capital loss. If a share has a lower cost than the giver's basis when given, then the recipient uses the giver's basis for capital gains, but the fair market value on the gift date for capital losses.

For example, if a share was bought for $20 and given to you for $15, you have a $5 capital gain if you sell it for $25, a $3 loss (not an $8 loss) if you sell it for $12, and no gain or loss (not a $2 loss) if you sell it for $18.

(edited to correct rule; example was correct)
Last edited by grabiner on Wed Jul 21, 2021 7:59 pm, edited 1 time in total.
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Matahari
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Re: Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by Matahari »

grabiner wrote: Tue Jul 20, 2021 7:54 pm The only special rule is the prohibition against gifting a capital loss. If a share has a lower fair market value (FMV) than the giver's basis when given, then the recipient uses the giver's basis for capital gains, but the FMV on the gift date for capital losses.

For example, if a share was bought for $20 and given to you for $15, you have a $5 capital gain if you sell it for $25, a $3 loss (not an $8 loss) if you sell it for $12, and no gain or loss (not a $2 loss) if you sell it for $18.
Thank you very much, grabiner. I was not aware of that special rule and, given the market's performance in the past few years, it was not applicable in this case at the time of the gift, but it is certainly good to know.

Your responses have always helped me and I am grateful!

ETA: corrections by MarkNYC and Grabiner.
Last edited by Matahari on Thu Jul 22, 2021 6:12 pm, edited 1 time in total.
MarkNYC
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Re: Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by MarkNYC »

grabiner wrote: Tue Jul 20, 2021 7:54 pm The only special rule is the prohibition against gifting a capital loss. If a share has a lower cost than the giver's basis when given, then the recipient uses the giver's basis for capital gains, but the basis on the gift date for capital losses.

For example, if a share was bought for $20 and given to you for $15, you have a $5 capital gain if you sell it for $25, a $3 loss (not an $8 loss) if you sell it for $12, and no gain or loss (not a $2 loss) if you sell it for $18.
I bolded two words above because I don't think the statement is worded the way you intended. Based on the example you provided, I think you intended to say: "If a share has a lower fair market value (FMV) than the giver's basis when given, then the recipient uses the giver's basis for capital gains, but the FMV on the gift date for capital losses."
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Re: Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by grabiner »

MarkNYC wrote: Wed Jul 21, 2021 7:28 pm
grabiner wrote: Tue Jul 20, 2021 7:54 pm The only special rule is the prohibition against gifting a capital loss. If a share has a lower cost than the giver's basis when given, then the recipient uses the giver's basis for capital gains, but the basis on the gift date for capital losses.

For example, if a share was bought for $20 and given to you for $15, you have a $5 capital gain if you sell it for $25, a $3 loss (not an $8 loss) if you sell it for $12, and no gain or loss (not a $2 loss) if you sell it for $18.
I bolded two words above because I don't think the statement is worded the way you intended. Based on the example you provided, I think you intended to say: "If a share has a lower fair market value (FMV) than the giver's basis when given, then the recipient uses the giver's basis for capital gains, but the FMV on the gift date for capital losses."
Thanks, fixed above.
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Re: Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by spade »

It seems that, according to Section 1015(e) of the tax code, the above "double basis rule" does not apply to gifts between spouses. (The original post does not exclude this possibility.)
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Re: Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by gobel »

Matahari wrote: Tue Jul 20, 2021 5:29 pm I have good records predating the gift relating to the acquisition of all shares, which will establish the cost and carryover basis for all shares. So, calculation of the long-term capital gain and, if any, short-term capital gain is not a concern.
Since these are mutual funds, these records might also need to include whether the original owner was using "average basis" and had disposed any shares already.

e.g. if they had bought 100@10 and 100@20, sold 100, and then given you 100 shares, then your basis would be 15, even if you have records showing purchases at the other amounts. (but if they gave you all 200 without selling while they had "average basis" set, I'm not sure if average still must be used)

If the gift were covered shares, I assume the broker would transmit the correct basis, but maybe not for non-covered shares so you would need to know this information.
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Matahari
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Re: Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by Matahari »

MarkNYC wrote: Wed Jul 21, 2021 7:28 pm
grabiner wrote: Tue Jul 20, 2021 7:54 pm The only special rule is the prohibition against gifting a capital loss. If a share has a lower cost than the giver's basis when given, then the recipient uses the giver's basis for capital gains, but the basis on the gift date for capital losses.

For example, if a share was bought for $20 and given to you for $15, you have a $5 capital gain if you sell it for $25, a $3 loss (not an $8 loss) if you sell it for $12, and no gain or loss (not a $2 loss) if you sell it for $18.
I bolded two words above because I don't think the statement is worded the way you intended. Based on the example you provided, I think you intended to say: "If a share has a lower fair market value (FMV) than the giver's basis when given, then the recipient uses the giver's basis for capital gains, but the FMV on the gift date for capital losses."
Thank you, MarkNYC, for the clarification! Very kind of you to point that out.
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Matahari
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Re: Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by Matahari »

grabiner wrote: Wed Jul 21, 2021 7:59 pm
MarkNYC wrote: Wed Jul 21, 2021 7:28 pm
grabiner wrote: Tue Jul 20, 2021 7:54 pm The only special rule is the prohibition against gifting a capital loss. If a share has a lower cost than the giver's basis when given, then the recipient uses the giver's basis for capital gains, but the basis on the gift date for capital losses.

For example, if a share was bought for $20 and given to you for $15, you have a $5 capital gain if you sell it for $25, a $3 loss (not an $8 loss) if you sell it for $12, and no gain or loss (not a $2 loss) if you sell it for $18.
I bolded two words above because I don't think the statement is worded the way you intended. Based on the example you provided, I think you intended to say: "If a share has a lower fair market value (FMV) than the giver's basis when given, then the recipient uses the giver's basis for capital gains, but the FMV on the gift date for capital losses."
Thanks, fixed above.
Thank you, again, Grabiner! I will fix the quoted part also, if allowed by this website.
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Matahari
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Re: Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by Matahari »

spade wrote: Wed Jul 21, 2021 9:19 pm It seems that, according to Section 1015(e) of the tax code, the above "double basis rule" does not apply to gifts between spouses. (The original post does not exclude this possibility.)
Thanks for the additional pointer. The gift was not between spouses.
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Matahari
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Re: Sale of "non-covered" and "covered" mutual fund shares received as gift

Post by Matahari »

gobel wrote: Wed Jul 21, 2021 9:39 pm
Matahari wrote: Tue Jul 20, 2021 5:29 pm I have good records predating the gift relating to the acquisition of all shares, which will establish the cost and carryover basis for all shares. So, calculation of the long-term capital gain and, if any, short-term capital gain is not a concern.
Since these are mutual funds, these records might also need to include whether the original owner was using "average basis" and had disposed any shares already.

e.g. if they had bought 100@10 and 100@20, sold 100, and then given you 100 shares, then your basis would be 15, even if you have records showing purchases at the other amounts. (but if they gave you all 200 without selling while they had "average basis" set, I'm not sure if average still must be used)

If the gift were covered shares, I assume the broker would transmit the correct basis, but maybe not for non-covered shares so you would need to know this information.
Thank you for your post, gobel. Fortunately for me, I have all the past statements as well, and there were no prior sales. I will find out if I can still select basis method.
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