SIE Exam Question 165: Answer and Explanation

Question: 165

What is the cost basis of securities given as a gift?

• A. The average of the high and low prices on the date of the gift
• B. The purchase price of the securities when they were originally bought
• C. The average of the current market price and the price originally paid
• D. None of the above

Correct Answer: D

Explanation:

The cost basis of securities given as a gift depends both (1) on whether the original cost exceeds the donation-date FMV and (2) on what the final selling price is. If the original cost is less than the donation-date FMV, then the original cost becomes the donee's basis. If the original cost exceeds the donation-date FMV, then we look to the final selling price. If the final selling price exceeds the original cost, then the original cost becomes the basis. If the final selling price is between the original cost and the donation-date FMV, then the sale price itself becomes the basis (such that no gain or loss is recognized). If the final selling price is less than the donation-date FMV, then the donation-date FMV becomes the basis. For example, a stock was purchased for $100 but valued at $80 when donated. If the donee later sells it for $110, his capital gain is $110 – $100 = $10. If the donee later sells it for $90, he has no capital gain or loss ($90 – $90). If the donee later sells it for $65, his capital loss is $80 – $65 = $15.