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1. They pay no tax on the transfer?

The recipient [almost] never pays tax on the transfer, no matter how large. The giver is the one that might have to pay a gift tax.

2. The "cost basis" for the stock in the transfer is reset to the value on the day of the transfer?

No. For calculating a gain, the recipient steps into your shoes and takes over your tax basis and holding period. For calculating a loss, they use your basis and holding period, unless the Fair Market Value on the date of transfer is less than your basis. In that case, they'd use the FMV instead of your cost.

In other words, someone will have to pay the tax on any gain at the time of the gift. If there is a loss at the time of gift, it will be lost and no one can use the loss. (Moral of that story - don't make a gift of stock that is at a loss. Sell it and give the cash instead.)

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