What occurs when the fair market value exceeds the donor's adjusted basis at the time of a gift?

When the fair market value of an asset exceeds the donor's adjusted basis at the time of a gift, it indicates that the donor is giving an asset that has appreciated in value. However, for tax purposes, the Internal Revenue Code stipulates that neither gain nor loss is recognized by the donor at the time of the gift itself.

Instead, the recipient of the gift will take a carryover basis, which is typically the donor’s adjusted basis in the asset. This means that the recipient effectively steps into the donor's shoes regarding the basis of the asset, which can lead to different tax outcomes for the recipient upon eventual sale of the asset. This approach is what leads to the “no effect on the basis” understanding when it comes to gifts in terms of recognizing gain or loss immediately upon the transfer of the asset.

In summary, while the fair market value exceeding the donor's adjusted basis indicates appreciation, it does not trigger a gain or loss recognition at the time of the gift. The basis of the asset for the recipient is determined by the donor’s basis, influencing future tax implications only when the recipient ultimately decides to sell the asset.