How are gains and losses treated when the fair market value of a gift exceeds its adjusted basis?

When a gift is made, the treatment of gains and losses in relation to the fair market value and the adjusted basis focuses on the nature of the transfer. In this context, when the fair market value of a gift exceeds its adjusted basis, it is essential to understand the gift tax rules and how they interact with capital gains.

For gifts, the donee receives the property with a basis that is the same as the donor's adjusted basis—unless the fair market value is less than the adjusted basis at the time of the gift. This means that when the donor makes a gift, any unrealized gains or losses do not come into play for the donor or the recipient at the time of the transfer. As a result, both gains and losses associated with the fair market value vs. adjusted basis of the property are disregarded until the donee sells the asset.

This approach ensures that the taxation of gains and losses is deferred until the recipient ultimately disposes of the gifted property, at which point the adjusted basis will determine if a gain or loss is realized based on the selling price compared to the adjusted basis carried over from the donor. Therefore, the correct response addresses how gains and losses are not considered at the time of the gift itself, making this the