How do capital gains work on stock that was given to you?
Question by ResearchGirl: How do capital gains work on stock that was given to you?
I had a life insurance policy and the company went public and gave its policy holders shares of stock in 2001. I just sold the stock and am wondering what I will pay in capital gains? Will I pay on the entire amount? Or on the gains from 2001 until today?
Best answer:
Answer by Robert W
I’d need more information to get specific, but in general, a taxpayer’s basis is the value of what they “paid” for it. If a person gave up some life insurance coverage for stock (willingly or not), its fair value (buybout value) would be their basis in the stock. It would be like they paid that amount for the stock, so that amount would be deducted from the gain.
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This is called demutualization. Your mutual (policyholder owned) insurance company converted into a stockholder owned company and you were given stock that represented your rights as an owner. You never paid for these rights, so your cost basis is zero and the entire thing is taxable. The good news is that it is a long term capital gain, so the actual tax will be very low.
Don’t be sad about the taxes. Demutualization is about the only time the financial world will give you free money. Enjoy it.