Question

You receive a gift from your friend. Your friend bought it for $10,000 and, therefore, your friend’s cost basis in the asset is $10,000. The FMV of the gift is $20,000 on the date of the gift. You own the asset for 2 years and then you sell it for $30,000.

a.What are the tax consequences for your friend? Your friend asks you to advise them of any and all potential tax consequences for him/her, now and/or in the future. Is there any reporting obligation for your friend?

Discuss fully in a memo that you would send to your friend. Remember, even if you are providing him/her with free advice, you have a professional responsibility to provide them with complete and accurate information, and your friend may ultimately bring your memo to a paid tax advisor who will undoubtedly judge you on your work product.

a.What is your basis when you receive the gift? State fully any applicable rule, and show your work in an easy to read, organized fashion. (My postings provide good examples as to format. Note that formulas are easier to read, and for your boss to check your work, than paragraphs.)

b.What is your gain or loss when you dispose of the asset? State any applicable rules fully, and show your work in an easy to read, organized fashion. (My postings provide good examples as to format. Note that formulas are easier to read, and for your boss to check your work, than paragraphs.)

Answer 1

ANSWER:-

(A). You gave me gift worth $20,000 (FMV). The exclusion limit for gift is $14,000. This means $14,000 are exempted from $20,000.

$20,000-$14,000=$6,000

Now, you are supposed to pay tax on $6,000.

Tax rate on amount between $0 to $10,000 is 18%.

Thus, you have to pay $6,000×18%=$1,080.

(a). My basis while receiving the gift will be same as the donor.

He gave me gift worth $20,000, so when I am selling that gift, my basis also would be $20,000 while calculating Short/Ling term capital Gain/Loss.

(b). There can be Short term or Long term Capital gain/loss. I hold that gift for 24 months. So, I have to calculate Short term capital gain/loss. The formula for calculating Short Term Capital Gain/Loss is as follows:-

STCG=Sale price - Expense incurred - Cost price

Here, I didn't made any expenses. So,

STCG=30,000-0-20,000

=$10,000

My Capital gain is $10,000.