Carryover basis is a type of basis used when calculating the taxes of a gift recipient. Taxes based on capital gains require looking at the change in value of an asset over time, usually looking at the purchase price. However, for individuals who receive an asset as a gift, there is no purchase price to base the gain on. Carryover basis calculates the capital gains of a gifted asset by using the purchase price of the original grantor. This is to be contrasted with a step-up basis for inherited assets which looks at the market value at the time of inheritance.
For example: Tom gave Rachel one share of Pear Inc. as a gift when the share price was at $100, and later Rachel sells the share when the price rises to $200. Under a carryover basis, Rachel would owe taxes on the $100 capital gains ($200-$100=$100). However, let us say instead Rachel received the share 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 gains ($200-$150=$50).
[Last updated in June of 2021 by the Wex Definitions Team]