Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

When stock is gifted, what is the recipient's cost basis if the stock has appreciated in value?

1. The purchase price

2. The current value

3. The lower of the purchase price or the current value

4. The higher of the purchase price or the current value

The correct answer is: The lower of the purchase price or the current value

When stock is gifted and the stock has appreciated in value, the recipient's cost basis is determined by the concept of basis in a gifted asset. The recipient inherits the donor's cost basis, which is the purchase price of the stock. If the stock has appreciated and the market value exceeds the original purchase price, the recipient's cost basis will still be the original purchase price. However, if the stock were to later decrease in value, the recipient would then use the market value as the basis, but only if they sold the stock at a loss. Choosing the lower of the purchase price or the current value recognizes that if the stock has appreciated (the current value is greater), the recipient will use the purchase price as their cost basis. Conversely, if they were to sell it at a loss, they would use the current value. Therefore, the correct answer reflects the principle that the basis for gifted stock is the original cost, but only relative to potential future dispositions.