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

As an investor, you can opt to donate a variety of financial assets, from government bonds to mutual funds as well as cold hard cash. For certain investors, directly donating shares of a publicly-traded stock can also be one of the most appealing ways to contribute to a cause they care about. Donating stock can even yield a number of tax benefits, which can be a welcomed bonus.

Still, the process of donating stocks can be incredibly nuanced and there are numerous pros and cons. The benefits of donating stock to charity depend heavily on your financial situation and long-term goals— but with a thoughtful approach and strategy, sharing your shares with charity can be the gift that keeps on giving.

Best types of stocks to donate

Clearly, there’s a significant upside for stock investors seeking to include charitable giving in their tax optimization strategy. There are, however, other factors to consider, including which kinds of stocks are best to donate. 

• Winner stocks– Highly appreciated stocks are an especially attractive asset group to target with this technique. If your portfolio is holding any stocks with a large, unrealized long-term capital gain— a position which would incur a large capital gain at the time of sale— it’s probably a good candidate for a charitable donation. 
• Stocks you’ve owned for over a year– Stock sales are subject to capital gains taxes, with different treatments based on how long the investor has held the stock. Whereas proceeds from short-term trades are treated as regular income, long-term gains are generally taxed at a lower rate, encouraging investors to hold their securities over longer time frames. The same principles apply to charitable contributions, and donors will obtain a much larger tax benefit for stocks contributed after the 1-year threshold. After one year and a day, these stocks will receive the ‘long-term’ capital gains treatment, meaning the donor will be able to deduct the full market value of their charitable contribution from their tax bill.
• Highly liquid stocks– For the sake of those receiving your donation, it’s also best to choose an asset that is highly liquid, and trades on a public exchange. Selecting a stock that is easy for the charity to liquidate saves them tons of hassle, as the process of setting up a brokerage account and conducting a complex securities sale can be burdensome for smaller organizations. Remember that on the other end of this transaction, there’s still a person who has to go through the trouble of cashing out your shares— save them some trouble and donate a liquid stock where possible.

Types of stocks you can’t donate

• Stocks owned for less than a year– If securities have been held for less than one year, donors would be subject to short-term tax treatment, meaning they’d only be able to deduct their cost basis for the donation. In other words, while it is still technically possible to donate stocks that don’t meet the holding period, your tax benefit is greatly reduced, and you’re likely better off donating cash or another asset. 
• Loser stocks– You wouldn’t want to donate stocks that have incurred portfolio losses, in place of a capital gain. In most cases, these losses offer their own tax benefits, so realizing the loss yourself could be a better means for offsetting other taxable income.
• Privately held stocks– Privately held stocks or restricted shares of public stocks aren’t the most charity-friendly contributions. While there’s no rule saying these can’t be donated to charity, some charities may not be equipped to handle private stock, and obtaining the approval to sell restricted shares of public stocks can be an administrative nightmare. Charities tend to immediately sell stock contributions, providing them with liquid funds for their mission, so as a donor it’s best to help make this sale as seamless as possible.

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 offers a list of organizations that do not fulfill their requirements for charitable classification (including certain political, civic, and lobbying groups), providing clear guidelines for donation deductibility.

Donors 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 footprint. For public charities and private operating foundations, donors may deduct the FMV of the donated stock up to 30% of AGI, but for certain private non-operating foundations, FMV deductions are limited to just 20% of AGI. Always be sure to double-check which category your organization of choice falls under.

Some investors will also find it advantageous to set up a unique charitable structure, commonly known as a Donor Advised Fund (DAF), well-equipped for optimizing the tax treatment of a variety of asset donations. For example, an investor holding a stock with a low-cost basis (which would generally be subject to a capital gains tax) can instead transfer the asset to a DAF and make a grant to a charity of their choosing at some future date. Not only will this allow the individual to take an immediate tax deduction— DAFs also offer donors more flexibility in the liquidation of the donation, allowing them to either convert it to cash immediately or reallocate the donated shares and grow the money over time.

Want to optimize your charitable giving?

Charitable giving can be one of the most fulfilling parts 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 for the recipient of your donation, you’ll need a strategy, personalized to your own 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.