Is Donating Stock to Charity the Way To Go? It’s Complicated.

When it comes to charitable giving, your instinct may be to reach for your checkbook or credit card. But if you’re looking to potentially increase your gift and tax deduction, consider donating your appreciated stocks directly to charity.

Stocks You Might Consider Donating

• Stocks you’ve owned for over a year—Securities owned for at least one year and one day are considered long-term capital gains. When you donate these shares to charity, you’ll receive a tax deduction equal to the full fair market value (FMV) of the stock on the date of transfer. (Technically, your deduction will be the average of the stock’s highest and lowest selling prices that day.)
• Highly liquid stocks—Before transferring stock, you need to make sure the charity is willing to directly accept non-cash gifts. Charities typically look to sell stock gifts as quickly as possible, both to generate cash that the organization can redeploy to fulfill their needs and to reduce the risk that the stock value will go down. Assuming the charity can accept stock gifts, it’s often easiest for charities to accept stock that is trading on a public exchange and easy to liquidate.

Think Twice Before Donating These Stocks

• Stocks owned for less than a year—If you’ve owned the stock for one year or less, your charitable deduction will be limited to your cost basis in the stock (oftentimes, your cost basis is roughly the value of the stock when you bought it). In other words, while you can still donate stocks that don’t meet the long-term holding period, your tax benefit is greatly reduced.
• Stocks that have lost value—In most cases, you won’t want to donate stocks that have decreased in value below your cost basis. You will likely want to realize these losses, as there are tax benefits to you, including netting against any realized capital gains or carrying the loss forward to future tax years.
• Complex assets—Some charities may not be equipped to handle complex assets, such as privately held C-Corp or S-Corp shares, private equity and hedge fund interests, commodities, and real estate investment trusts (REITs). Consider transferring these assets to a charitable giving vehicle such as a Donor Advised Fund oar charitable trust and reallocating the assets within the giving vehicle to make distributions to charity.
• Restricted stock—Just like complex assets, you need to be sure the charity has the resources and experience to accept and liquidate restricted stock. Additionally, if you are considered a “control person” in your company (for example, you are an officer, director, or 10% shareholder), you will be subject to SEC Rule 144, which regulates the public resale of restricted securities. You and the charity may also need to gain approval from the company to transfer or sell shares. If the organization does not have the systems in place to accept restricted stock, consider donating your restricted stock to a Donor Advised Fund (DAF), which is a turnkey charitable giving vehicle with low costs and complexity. Essentially, you can liquidate the shares inside the DAF and then transfer cash from the DAF to the charity.

Types of Charities You Can Donate Stock To

There’s no shortage of good causes out there, and as a result, there’s likely a wide variety of organizations competing for your charitable attention. For those seeking to make a tax-deductible donation, however, it’s important to double-check that you’re contributing to a qualified charity. The IRS provides a list of organizations that do not fulfill their requirements for charitable deduction, including certain political, civic, and lobbying groups. It’s a good idea to check this list before you begin planning.

As a donor, you should also be beware of the differences between public charities, private operating foundations, and private non-operating foundations.

Public charities are organizations that receive support from a wide cross-section of donors. Private foundations receive funding through private contributions, investments, and endowments. A private operating foundation will spend substantially all of its income each year fulfilling its charitable mission, while a private non-operating foundation will typically make grants to other organizations and may not distribute all their contributions received each year.

When it comes to the deduction benefit, private non-operating foundations offer a smaller tax deduction. When donating stock to public charities and private operating foundations, donors may deduct up to 30% of AGI. When donating stock to private non-operating foundations, deductions are limited to just 20% of AGI. Always be sure to double-check which category your organization of choice falls under.

As mentioned above, some investors find it advantageous to set up a Donor Advised Fund (DAF) to help facilitate the donation of stock. An investor holding a stock with a low-cost basis (which would be subject to capital gains tax if sold) can instead transfer the asset to a DAF and make a grant to a charity of their choosing at some future date. Donors can take an immediate tax deduction. DAFs also offer donors flexibility when liquidating a stock, allowing them to either convert it to cash immediately or reallocate the donated shares to other investments and potentially grow the money over time. You can learn more about using Donor Advised Funds (DAFs) and Charitable Trusts in our podcast episode here.

Want to Optimize Your Charitable Giving?

Charitable giving can be a fulfilling part of having wealth. Through your own financial wellness, you can make a positive impact on the causes you care about most in this world. Still, you don’t just want to give blindly. When structuring your donations, there’s a number of challenges you may encounter—tax pitfalls, deduction limits, liquidation issues—which is why it’s important to stay well-informed about contribution rules and requirements.

To maximize the benefit for both yourself and the recipient of your donation, you’ll need a strategy that is personalized to your specific financial needs and objectives. This is where Private Wealth Design comes into play. By helping you design a customized plan for growing your wealth over time, our team at Monument can help you consider all available charitable giving options, providing a clearer understanding of why it’s worthwhile to choose one over another.