You can legally buy stock for someone else, but depending on how you do it, you could end up holding the bag on a loss or having to pay extra income tax. The key to avoiding problems is making sure you communicate your intentions correctly and putting your deal in writing.
Following a few basic steps when making a stock purchase for someone else or transferring stock you already own will help you avoid problems and keep your finances and friendships in good order.
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Read More: How to Transfer Stock Certificates
Give It as a Gift
You can buy stock for someone else with the intent of giving it as a gift, such as buying stocks for Christmas gifts. This can help interest young people in the stock market and start saving for retirement. It can also help you reduce your tax liability.
Let's say you have a stock that's appreciated in value and if you keep it and sell it, you pay capital gains taxes on it. If it's a short-term gain, you'll pay a tax rate equal to your income tax rate. If you gift the stock to a family member or friend, you not only don't pay the tax, but your giftee won't pay any taxes either (if she doesn't sell the stock) or will pay a lower tax rate (if she has a lower personal income tax rate than you).
The government imposes limits on financial gifts to others each year without the recipient having to pay taxes, explains The Motley Fool. Check with a professional to learn what the current year's amount is.
If you hold a physical stock certificate, you can transfer the certificate, similar to endorsing a check over to someone. You can also use a stockbroker to make the transfer electronically.
Read More: Investment Loss & Tax Deduction
Just Make the Buy
Let's say you have a friend or family member who really wants to get in on a hot stock before it's too late. He doesn't have a trading account or broker or doesn't have the money right now. He asks you to buy 100 shares of the $40 stock. You agree and spend $4,000 making the purchase. Now what?
If the stock goes up and your friend wants to sell it and cash out, who pays the capital gains taxes? Obviously, you want your friend to pay the tax. What if the stock goes down and your friend doesn't have the $4,000 to pay you?
The lesson here is clear – put everything about the deal in writing, including who gets the profits, who gets stuck with any loss, when you will be paid your money and who pays the taxes. Talk with your tax preparer to make sure you purchase and any gains don't put you into a higher tax bracket or cause you other problems.
Read More: What Happens After You Buy Stock?
Other Ideas for Gifting Stock
You can gift stocks to charities, which helps them improve their financial footing and can help you avoid capital gains taxes and enjoy a tax write-off. One way to interest very young people in the stock market and investing is to buy them a single share of stock in one or more companies that make products or services they enjoy. Children might like seeing how their Nintendo or Disney stock does each year, and you can get a physical certificate you can frame that they can hang on their wall.