If you purchase a stock, bond, note or mutual fund from a family member or related party entity, you will become subject to the "related party" rules.
Under these rules, your cost basis will actually depend on whether you end up selling it at a gain or a loss. You will not know your cost basis for sure until the date of sale!
Here is how it works:
Assume your sister owned stock of XYZ Corp which she bought for $20,000. It had declined in value to $10,000 when you bought it from her. She is NOT allowed to claim a capital loss when she sells it to you because you are a related party.
GAIN SCENARIO:
IF you sell it later to a third, unrelated party for $22,000, you will have a true gain of $12,000 on your own acquisition cost of $10,000, but you only have to declare a capital gain of $2,000 for income tax purposes because you are allowed to use a carryover basis from your sister, since she was not able to claim the previous disallowed loss.
LOSS SCENARIO:
IF you sell it later to a third, unrelated party for $8,000, you will have a true loss of $2,000 on your own acquisition cost of $10,000, and you can only declare a capital loss of $2,000 for income tax purposes. You are NOT allowed to use a carryover basis from your sister, even though she was not able to claim the previous disallowed loss. The tax savings from the previous disallowed capital loss are wasted and no one can claim them.
