For high-income individuals, donating is an act of kindness and a strategic move. Being strategic with charitable acts can maximize philanthropic impact while minimizing tax liability. One of the most underutilized methods for this is donating appreciated stock instead of cash, which helps reduce capital gains taxes and improve tax efficiency.
When truly understood, this approach can align humanitarian goals with effective long-term financial planning, making it an important option for all seasoned investors to consider. Appreciated stock used correctly can be a force for good rather than a monetary loophole.
Why Appreciated Stock Is a Powerful Giving Tool
When stock rises significantly in value, selling it immediately can trigger capital gains taxes. This means reducing the overall profit from the investment and the amount ultimately available for charitable giving. Alternatively, donating the asset directly avoids this friction.
The most notable advantage of this method is that the entire value of the stock can be given away while avoiding capital gains taxes entirely, making this asset a highly valuable tool for charitable donation. Furthermore, avoiding the taxable sales that come with selling a stock that has grown can help prevent portfolio imbalance, maximize investor flexibility and increase charitable donations, creating a win-win situation.
Choosing the Right Assets to Donate
Donors should understand which stocks are ideal for donation. In general, assets with the highest unrealized gains have the greatest tax leverage. Common holdings include individual traded stocks, mutual fund shares and exchange-traded funds. Publicly traded asset donations valued at over $5,000 do not require an appraisal, according to the IRS. An especially good choice is when an asset has high unrealized gains but also no longer aligns with an investor’s portfolio objectives.
However, charities may not always accept securities that are illiquid or restricted, so additional planning is needed. A disciplined approach involves identifying assets that are tax-efficient when donated and readily accepted by charitable organizations.
Selecting the Right Charitable Vehicle
Choosing the right charitable organization is just as important as selecting the right asset to donate to. Different structures impact tax efficiency and control. Common options include:
- Public charities: Donating to IRS-qualified nonprofit organizations that receive most of their funds from the public or the government means donors get to claim an immediate charitable deduction while avoiding capital gains tax.
- Donor-advised fund (DAFs): DAFs allow people to make tax-deductible contributions of assets and recommend grants to qualified nonprofits, providing flexibility without the need to manage a private foundation. DAFs are typically affordable and easy to administer, although the ability to choose recipients may be limited.
- Charitable trusts: Investing in a trust can help donors conveniently plan short- and long-term donations and protect assets. They can also avoid capital gains tax and rebalance their portfolios.
- Cryptocurrency: As with any other investment, the IRS views cryptocurrency as property, making it eligible for capital gains tax. Donating crypto assets like bitcoin or solana results in a fair-market-value deduction.
The Importance of Timing
Outside of which assets to donate and which charitable vehicles to select, when to donate is an immensely important consideration for people looking to give away appreciated stock. The timing of a donation can change the tax result in meaningful ways, especially if the taxpayer’s income is unusually high or when a change in tax rules is being implemented.
A financial adviser can help investors make the right decision about when to time their donations and how they align with broader goals. This is especially helpful with bigger donations, where investors are particularly interested in valuation rules and documentation.
Making the Most Out of Philanthropy
When studied and utilized effectively, donating appreciated stock to charitable organizations is one of the best ways for high-net-worth investors to give back to communities. It is an act that is mutually beneficial, allowing people to avoid capital gains tax, rebalance their portfolios and maximize contributions to those in need.
