Why Stocks Are a Gift that Keeps on Giving

When December arrives, many people around the globe are looking for the perfect gifts for various occasions. Whether you're shopping for Hanukkah, Christmas, Kwanzaa, a birthday, or any other occasion, stocks are one gift idea that will never go out of style.

Survey says: Most Americans want to receive an investment as a holiday gift

In fact, a new poll from Yahoo! Finance and Ipsos published just the other day found that Americans overwhelmingly want to receive investments as gifts for the holidays. According to the survey, 68% of Americans said they would be happy to receive an investment as a holiday gift, while 43% said they would be "very happy" to receive an investment.

Only 6% of Americans said they would be disappointed to receive an investment, while 24% said they wouldn't be happy or disappointed to receive an investment. The reasons cited for wanting to receive an investment as a gift vary. The poll found that 61% of Americans want to receive an investment because it will help them save for the future, while 54% cited wanting to build wealth. Twenty-three percent said receiving an investment would help them stay ahead of inflation, while 15% said it would help them pay off debt, and 12% cited the recent gains in the stock market.

Of course, when planning gifts for children, stocks might not seem like an obvious choice. However, they can provide a great way to teach kids about investing and the stock market.

What you need to know before giving stocks

Before diving in and buying some shares of stocks to give, there are some implications you should be aware of, especially in terms of taxes. First, there's the gift tax, which is applied to very large gifts that exceed the lifetime limit.

As of 2023, taxpayers can give individuals up to $17,000 worth of cash, investments, or other assets like vehicles or houses in a single year. This amount doesn't apply to your spouse if they are a U.S. citizen or your dependent children.

If you want to give stock worth more than $17,000 this year, you probably won't be saddled with a gift tax, but you will have to file paperwork with the Internal Revenue Service disclosing the gift and how much it was worth. That form will also enable you to apply however much you gave over the $17,000 annual limit to your lifetime gifting limit, which is $12.92 million to a single individual as of 2023.

Most people probably won't go over that, so the gift tax is rarely applied. However, it's never a good idea to skip forms like this one because the IRS really likes its paperwork.

The other tax to consider at the time you plan to give shares of stock is the capital gains tax. Things get a little tricky when you give away stock that you've owned for a long time, so it might be a good idea to purchase stock specifically to give away rather than gifting shares you've held for a long time.

The reason is because the person you give the stock to could have to pay capital gains taxes not only on the gains they've seen since receiving it from you but also on all the gains you've notched since you originally bought those shares. After all, you don't pay capital gains taxes on stock when you give it to someone else.

Of course, it can be beneficial to give stock to someone whose tax rate on long-term capital gains (for assets held over a year) is 0% when they go to sell those shares. However, the waters become murky here, and this is when you need to consider this next tax.

One tax for later

If you're giving stock to a child who is your dependent, you'll need to consider the so-called "kiddie tax." This tax applies to large monetary gifts or assets given to dependent children age 18 or younger or who are between the ages of 19 and 23 but are full-time students.

While you won't need to worry about the kiddie tax now, it is something to consider for the future because it applies to your dependents' unearned income, meaning capital gains, dividends, taxable interest, taxable scholarships, and other forms of unearned income.

As of 2023, there's no tax applied to the first $1,250 of a dependent child's unearned income within a tax year, and the second $1,250 in unearned income is taxed at the child's tax rate. However, anything higher than $2,500 is taxed at the marginal tax rate of their parents. A notable exception is for a child whose earned income amounts to over 50% of the cost of their support.

Choosing stocks to give

After considering the many potential implications of such a gift, now comes the fun part: choosing the stocks you want to give. Of course, the best choices will differ depending on various factors. In an email, Michael Kim, senior financial analyst for Zacks Small Cap Research, highlighted the most important factors to consider when choosing stocks to give.

“It’s important for donors to keep in mind the beneficiary’s investment profile, financial objectives, income, and/or age when picking which stocks to gift, if possible, and to make sure recipients understand the risks related to future stock price performance and volatility, as well as potential tax liabilities down the road,” he explained.

For children, it's a good idea to select shares in companies they know well. Depending on the child's interests, some excellent choices may be Hasbro (HAS) or Mattel (MAT), Warner Bros. Discovery (WBD), Nintendo (NTDOY) or Sony (SONY), Nike (NKE), Apple (AAPL) or Meta Platforms (META).

You could also opt for brand-name recognition with names such as: Amazon (AMZN), Alphabet (GOOGL), Coca-Cola (KO) or PepsiCo (PEP), DoorDash (DASH), McDonald's (MCD), Walmart (WMT) or Target (TGT), Microsoft (MSFT), or Ford (F), General Motors (GM), or Tesla (TSLA).

No matter who the recipient is, they could probably benefit from the income generated by dividend stocks. In an email, Covert Concepts CEO Jay Pollack pointed out that dividend stocks are attractive gifting options because they are attractive to avoid paying a large capital gains tax due to the “enduring benefit of regular income and potential for growth.”

“Dividend-paying stocks like those of Apple and T-Mobile are like unwrapping gifts that continue to enrich,” he said. “They not only symbolize a thoughtful investment in the future but also serve as practical tools for young family members to familiarize themselves with the world of investments and everyday technology.”

Some excellent options in this category could include Verizon (VZ), Johnson & Johnson (JNJ), Comcast (CMCSA), United Parcel Service (UPS), and AT&T (T), among many others.

Finally, some people find it easier to give a wider array of stocks by gifting exchange-traded funds (ETFs), which trade like stocks but contain many solid picks based on various themes. For example, many ETFs cover different aspects of technology. There is also a wide variety of ETFs that track indexes like the Nasdaq Composite, Nasdaq 100, or S&P 500, providing the recipient with diversification.

How the gifting process for stocks works

The final note here involves the logistics of how you actually give someone shares of stock. As already mentioned, it may be a good idea to purchase shares specifically for gifting purposes, barring a very specific set of circumstances surrounding the capital gains tax.

If you do decide to move forward, the process of gifting stock is slightly different depending on the age of the recipient and your relationship with them. For example, the easiest way to give stock to your minor children is by establishing a custodial brokerage account with them.

Once you have set up the account, you can either transfer securities into it from your personal online brokerage account or purchase the stock directly inside the custodial account. Either way though, the transfer can't be undone. Your child will gain full access to the brokerage account when they reach the age of majority, which is usually 18 or 21, depending on what state you're in.

If you're giving stock to an adult child, friend or other family member, you'll need to make sure they have a brokerage account and get their information so that you can make the transfer. If they don't have an account, you can help them open one and fund it for them as part of the gift.

While the process of gifting stocks might seem a bit confusing at first, especially with all the tax implications, it will certainly be worth the effort. Stocks with long-term track records of price appreciation have the potential to keep giving for many years to come.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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