How are gifts typically valued for tax purposes?

Gifts are typically valued for tax purposes at their fair market value on the day of the gift. Fair market value is defined as the price at which property would change hands between a willing buyer and a willing seller, both having reasonable knowledge of all relevant facts and not being under any compulsion to buy or sell. This valuation method captures the item's true worth at the time it is gifted, ensuring that the gift tax is assessed accurately based on current market conditions.

This approach is crucial because it reflects the economic reality of the asset being transferred. For example, if an individual gifts a piece of real estate or valuable personal property, fluctuations in market conditions can significantly alter its fair market value, necessitating that the tax implications take into account that most relevant and immediate assessment. By using the fair market value on the date of the gift, the IRS establishes a consistent and equitable standard for valuing gifts made during one’s lifetime, which will ultimately factor into the donor's lifetime gift tax exclusion and the overall estate tax calculation upon death.