The Double Tax Benefit of Gifting Appreciated Stocks to Charity Instead of Cash
Every December, Americans scramble to find last-minute ways to lower their tax bills. And one of the most common strategies—particularly among high-income earners—is to make charitable donations often by writing a check to support their favorite cause.
While cash contributions are simple and straightforward, they are not always the most tax-efficient way to give. For those who own stocks that may have appreciated significantly from when they were purchased, donating shares instead of cash can provide a double tax benefit. In this instance, the donor not only avoids capital gains taxes on the appreciation but also receives a deduction for the stock’s full fair market value.
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This approach is particularly well-suited for individuals who are already committed to charitable giving and donate substantial amounts annually. If someone regularly donates $50,000 to their favorite charities each year via check, shifting the approach and using appreciated stock optimizes the tax impact avoiding any additional cost.
For individuals who receive restricted stock units (RSUs) or incentive stock options (ISOs) as part of their total compensation, gifting appreciated stocks to charity can be particularly attractive. These employees often accumulate substantial positions in their company’s stock over time, sometimes at a very low cost basis.
If the stock has performed well, selling it outright would trigger significant capital gains taxes. But, when donors gift appreciated stocks held for more than one year directly to any qualified 501(c)(3) charitable organization, they are generally allowed to claim a charitable deduction for the fair market value of the stock on the date of the transfer, sidestepping those taxes entirely.
For example, consider an employee of a company like Microsoft who joined in the early 2000s receiving stock grants and participating in the company’s employee stock purchase plan (ESPP). With Microsoft’s aggressive investments in artificial intelligence and cloud computing over the past few years, its stock has surged, significantly increasing this hypothetical employee’s net worth. This growth, however, comes with the downside of a looming future tax liability.
Say this employee owns Microsoft shares that they received or purchased 20 years ago at an average cost basis of $30 per share. Today, those shares trade at around $400. If the employee were to sell shares outright, they could face long-term capital gains taxes of up to 20%, plus an additional 3.8% net investment income tax depending on their income level. In terms of dollars, that means that selling $250,000 worth of stock would generate a taxable gain of about $231,000, resulting in approximately $55,000 in Federal taxes alone.
If instead they donate those shares directly to charity, they can deduct the full $250,000 fair market value while completely avoiding the capital gains tax. This strategy not only maximizes the tax benefits for the donor but also often results in a larger donation to the charity, as the full market value of the stocks is transferred without any deductions for taxes.
For individuals facing an unusually high-income year due to the acceptance of an early retirement package, the sale of a business, or some other large windfall, donating appreciated stock to a donor-advised fund (DAF) can provide even greater flexibility. A DAF allows donors to front-load multiple years' worth of charitable giving into a single tax year, securing a larger deduction when it is particularly most valuable while retaining the option to distribute those grants to the intended charities over time.
Revisiting our Microsoft employee example, imagine the employee accepts a generous buyout package that pushed their taxable income into the highest bracket for one final working year before transitioning into early retirement, and subsequently, a lower tax bracket. Rather than making their usual $50,000 donation to the Boys and Girls Club of America, they could instead contribute $250,000 worth of Microsoft stock to a DAF in year one and then spread those gifts out over the next five years. This would help offset the tax bite of their final paycheck while also continuing the same level of charitable giving in future years while cash flow is lower.
For charitably inclined investors, gifting appreciated stock can be a powerful way to maximize both philanthropic impact and tax efficiency. While cash donations remain the most common form of charitable giving, contributing long-held stocks with significant unrealized gains offers a double tax advantage. It is a win-win scenario that encourages generous giving while providing financially savvy donors with a more optimal outcome.
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Malcolm Ethridge, CFP® is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. He is also the Managing Partner of Capital Area Tax Consultants.
Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
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