On December 15, 2016 Ralph gave his daughter, Barbara, stock that had an adjuste

Question

On December 15, 2016 Ralph gave his daughter, Barbara, stock that had an adjusted basis to Ralph of $8,000 and a fair market value on the date of the transfer of $6,000). Ralph paid a gift tax attributable to this transfer. Barbara sold the stock on June 19, 2017 for $10,000. How much was Barbara’s recognized gain and the character of the gain? a. $2,000 short-term capital gain b. $2,000 long-term capital gain c. $4,000 ordinary income d. $4,000 short-term capital gain e. We need to know the amount of the gift tax paid by Ralph in order to answer this question.

My answer is (a) 2,000 short term gain ..Is this correct and if not can you explain where I have error?

Stock held for 6 months

10,000-8,000=2,000.

Explanation / Answer

Answer:

Correct answer is:

e. We need to know the amount of the gift tax paid by Ralph in order to answer this question.

Explanation:

Adjusted basis to Ralph = $8,000

Fair market value on the date of the transfer = $6,000

Barbara sold the stock on June 19, 2017 = $10,000.

As the sale of stock is at Gain, donor's cost basis has to be used to calculate capital gain and purchase/acquisition date of donor will characterize realized capital gain. Further, since donor has paid gift tax, donor's basis has to be adjusted on the basis of gift tax paid. As such we need to know gift tax paid by Ralph.

As the cost basis will be donor's basis which is $8000 plus adjustment required based on gift tax paid, options a, b, c and d are all incorrect.

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