Donating stock is the most tax-advantageous way to give.
You're probably used to supporting your favorite nonprofit with a cash, check, or credit card donation. But did you know there's a better way to give? Donating appreciated non-cash assets, such as stock, is the most tax-advantageous way to give. In fact, you can give up to 20% more to charity because of the potential to eliminate capital gains tax. You'll want to read on ⬇️
GIVE MORE @ $0 COST.
Contributing appreciated non-cash assets held for more than one year can increase your charitable impact in two ways:
You'll protect your gift from the capital gains tax it would incur if you sold the assets and donated the proceeds.
By itemizing the gift, you'll be able to claim a fair market value charitable deduction.
In summary: the combination of protecting your long-term appreciated stock gift from capital gains tax PLUS claiming a fair market value deduction results in a larger donation than if you were to sell the shares and donate the cash proceeds.
HOW DO CAPITAL GAINS TAXES AFFECT ME AND MY FAVORITE NONPROFITS?
Capital gains tax would be APPLIED to your held assets if you were to sell those assets, and then donate the cash proceeds to a nonprofit.
Capital gains tax would be AVOIDED if instead of selling the assets and donating the proceeds, you simply donated the assets directly to a nonprofit.
PLEASE EXPLAIN FURTHER...
Let's spotlight generous donor, Alex. Alex has worked at Apple as a product designer for 3 years. Alex is inspired to give to a local organization that has worked to bring COVID-19 vaccinations to under-resourced communities in the Bay Area.
As an Apple employee, Alex is fortunate to have a portfolio of publicly-traded stock, and he wants to make a $10,000 gift to support this organization. Alex could either:
- Sell $10,000 worth of his Apple stock that he has held for over 1-year and incur up to 20% in capital gains tax on that donation before the nonprofit even sees this gift.
- Donate the AAPL shares directly to the nonprofit, protecting his donation from capital gains tax, and enabling him to take a larger tax deduction on the fair market value.
Let's break this down:
If Alex donates directly, he'll be able to make a larger impact at zero additional cost to him, and the nonprofit will be able to receive the full value of his intended donation.
It is a win-win situation.
Newsweek: The Positive Impacts of Biden's Capital Gains Tax
FAIR MARKET DEDUCTION
If you've held stock for over a year and its value has risen, you will get a tax deduction equal to the fair market value of that stock when the nonprofit of your choice receives your donation. For example, if your favorite nonprofit receives your donation of 1 share of Google into their brokerage account on July 1, 2021, you would itemize a tax deduction of $2,513.13, the fair market value of 1 share of Google on July 1, 2021.
For short-term assets, (stock held less than a year), you would deduct the cost-basis (the price at which you purchased the shares) OR the current fair market value, whichever is the lower value.
FAIR MARKET VALUE
For publicly-traded stock, the fair market value of the gift is determined by the average between the high and low selling price of the stock on that day. Important note: because the fair market value of a stock changes day to day, the amount you will itemize as a charitable deduction on your taxes is based on the date the stock is received into the nonprofit's brokerage account, NOT the day you initiated the transaction.
CAPITAL GAINS TAXES
Capital assets are non-cash assets including stocks, bonds, cryptocurrency, etc. When you sell a capital asset for more than you originally paid for it, the result is a capital gain. Think of it like income. A capital gains tax is a tax on the profit made from the sale of a non-cash asset. The tax amount depends on how long you've held the asset at the time of sale, either long-term (over one year) or short-term (less than one year).
LONG-TERM CAPITAL GAINS
Long-term capital gains are the profits gained on assets held for over 1 year before they are sold. Long-term capital gains are taxed according to taxable income thresholds, either 0%, 15%, or 20%.
SHORT-TERM CAPITAL GAINS
Short-term capital gains are the profits gained on assets held for less than 1-year before they are sold. These gains are taxed just like general income, so up to 37% depending on your tax bracket.
Overflow does not provide tax, legal, compliance, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, compliance, or accounting advice. Your organization should consult its own tax, legal, compliance, and accounting advisors before sending or concluding any transaction, communication, or otherwise.
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