Downstream gifting is a tax strategy that lets you transfer appreciated assets, like stocks or ETFs, to your children or other family members in lower tax brackets. By doing this, you can save thousands in long-term capital gains tax.
Most investors never consider it, but if applied correctly, downstream gifting can be a simple, legal, and effective way to keep more money in your family.
How It Works
- You own an investment (stocks, ETFs, mutual funds) that has grown in value.
- Instead of selling the asset yourself and paying capital gains tax, you transfer it to your adult child.
- The child sells the investment and pays tax at their own rate, which could be 0%.
This works because the asset carries over its original cost basis and acquisition date when gifted. The difference comes down to whose tax return the gains land on.
Example
Say you want to give your child $10,000.
Option 1: You sell the investment.
- Purchase basis: $2,500
- Gain: $7,500
- Tax: 15–23.8% on $7,500 = $1,125–$1,785
Option 2: You transfer the shares to your independent (non-dependent) child.
- Your child earns $50,000 per year.
- With the 2025 brackets, their taxable income after the standard deduction is under the $48,350 threshold for the 0% long-term capital gains rate.
- They sell the $10,000 of shares, realize $7,500 in gains, and pay 0% federal capital gains tax.
Net savings: over $1,000 for your family.
Important Rules
- Dependents and the Kiddie Tax: If your child is a dependent, this strategy won’t work the same way. The kiddie tax applies, and only about $2,700 of gains can be harvested at the 0% rate in 2025.
- State Taxes: Some states still tax capital gains, even if the federal rate is 0%.
- Impact on Credits: Capital gains increase income, which may reduce eligibility for credits like the Saver’s Credit.
- Specific ID: When gifting, use Specific Identification on your brokerage account to transfer the exact tax lots with the largest gains.
Why It Matters
Downstream gifting doesn’t just save taxes—it keeps wealth circulating in your family without unnecessary leakage to the IRS. It’s especially effective if:
- Your kids are early in their careers and in lower brackets.
- You plan to help with living expenses, tuition, or down payments anyway.
- You have large taxable brokerage positions with built-up gains.
- Liability lawsuits and long-term care costs threaten wealth.
- Umbrella liability insurance and proper business structures are essential.
- Evaluate life insurance for estate planning, not just income replacement.
When to Avoid It
- If your child’s income is already high, they won’t qualify for the 0% bracket.
- If you plan to keep your assets until death, a step-up in basis could wipe out the gains tax-free.
- If gifting could disqualify your child from financial aid or tax credits, think twice.
Final Thoughts
Downstream gifting is a powerful but underused tax strategy. The key is knowing who in your family is in the lowest bracket and planning transfers around that. For many parents, this is a way to help children financially while saving the family significant tax costs.
Like most tax strategies, execution matters. If you’re considering this, review your situation with a financial advisor or tax professional before making the transfer.
