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Simple English definitions for legal terms
carryover basis
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A quick definition of carryover basis:
Carryover basis is a way to figure out how much tax someone owes when they get a gift of something valuable, like a stock or a piece of property. Normally, when you sell something for more than you paid for it, you have to pay taxes on the profit. But if you get something as a gift, you didn't pay for it, so there's no "cost basis" to figure out the profit. With carryover basis, you use the original cost basis of the person who gave you the gift to figure out how much profit you made when you sell it. This is different from a step-up basis, which is used when you inherit something and the cost basis is adjusted to the value of the item when the person who gave it to you died.
A more thorough explanation:
Carryover basis is a way to calculate taxes on a gifted asset. When someone receives a gift, they don't have a purchase price to use for calculating capital gains taxes. Carryover basis uses the original purchase price of the asset to calculate the gain.
Tom gave Rachel a share of Pear Inc. as a gift when the share price was $100. Later, Rachel sold the share when the price rose to $200. Under carryover basis, Rachel would owe taxes on the $100 capital gain ($200 - $100 = $100).
Another example: Rachel inherited a share of Pear Inc. from Tom's will when the stock price was $150. In this case, a step-up basis would apply, and Rachel would only owe taxes on the $50 capital gain ($200 - $150 = $50).
Carryover basis is used when someone receives a gift and needs to calculate capital gains taxes. It uses the original purchase price of the asset to determine the gain. In the first example, Rachel received a share of Pear Inc. as a gift and sold it later. The gain was calculated using the original purchase price of $100. In the second example, Rachel inherited the share and the gain was calculated using the market value at the time of inheritance.