What happens to the basis of an asset if it is gifted?

When an asset is gifted, its basis remains at the donor's basis, which is known as "carryover basis." This means that the recipient of the gift takes on the asset at the same basis that the donor held it, rather than receiving a stepped-up basis that reflects the current fair market value at the time of the gift. This principle is important in estate planning and tax implications because when the recipient eventually sells the asset, they will be responsible for any capital gains taxes based on the original basis, not the value at the time of the gift.

Carrying over the donor's basis helps determine any potential gain or loss when the asset is sold in the future. The concept of carryover basis applies to most gifts, with the primary exception being assets that are inherited, which do receive a step-up in basis to their fair market value at the date of the decedent's death. Understanding this principle is essential for accurate tax reporting and planning related to gifted assets.