Giving stock, instead of cash, as a donation to an organization can greatly benefit both parties. You will find that many charities, hospitals, schools, and other nonprofit organizations will accept stock as a gift or donation.
- Many non-profits, such as hospitals, schools, and various other organizations, will accept stock as a gift or donation.
- Giving stock often results in a larger donation to the organization, as the gift is tax-deductible and there are no capital gains taxes to pay.
- If your stock has risen in value since purchase, donating it directly is preferable, but if it's lost value, it may be more advantageous to sell it first and then donate the profits, so the giver can take the tax loss.
Tax Benefits of Donating Stock to Charity
If the stock has increased in value from the time of purchase, the owner can avoid paying the capital gains tax by donating the security to another party. When the security is being donated to a charitable organization, the total amount will still be eligible for a tax deduction. Since taxation is avoided on the stock donation, the giver will be able to make a larger donation.
For example, let's say you were looking to make a $1,000 donation to a charity. You could either give cash or donate stock. Let's assume that you bought stock for an original purchase price of $700, but it is now worth $1,128.55. To make it simple, let's assume capital gains tax is 30% of the stock's appreciation. Selling the shares for cash would net about $1,000 after capital gains tax (1,128.55 - (1,128.55 - 700)*0.30).
In this case, it shouldn’t matter to your bottom line whether you are donating the entire stock or giving cash, as both choices will cost you $1,000. However, the charity can receive more benefit from a stock donation, as they will receive a gift valued at $1,128.55, instead of the $1,000 in cash.
One thing to note, if you hold the stock for longer than a year before giving it away, then you can deduct the full fair market value of the donated stock. Otherwise, if it was held for less than a year, your deduction is limited to the cost basis.
Meanwhile, if you're holding a stock that is trading for less than you paid for it, it’s usually better to sell first before donating the cash to charity. This allows you to take the loss for tax purposes.
Chris Hardy, CFP®, ChFC, EA, CLU
Paramount Investment Advisors, Inc., Suwanee, GA
One of the best ways to give to charity is through highly appreciated stock. Here is how it works:
Contact the charity to which you would like to donate. Many will have a brokerage account with one of the larger brokerage firms. They will give you wire instructions to have the stock transferred. Make sure that your brokerage firm knows that you do not want to sell the stock, but instead would like a "transfer in kind" to the charity. This way, the charity can sell the stock and use the funds for the charitable purpose without having to pay taxes on the gain.
If you have a stock with a built-in loss, do not donate it "in kind." Instead, sell the stock and take the loss on your personal tax return. Give the proceeds to the charity, which will go on your Schedule A as an itemized deduction.