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Donating Stock - A Better Deal for Both You and a Favorite Charity

  • 2000 12 Dec
  • COMMENTS
Donating Stock - A Better Deal for Both You and a Favorite Charity
By John E. Chilton, CPA, for Sound Mind Investing


Stocks and mutual funds have increased substantially in value over the past five years. If you have been one of the beneficiaries of this happy event and are considering some additional year-end giving, consider contributing some of your stock or fund shares rather than cash. Such gifts can result in significant income tax benefits for the investor.

Here's how it works. Assume you would like to make a year-end gift of $10,000 to your church or a favorite Christian charity. Further assume that some stock you purchased several years ago for $4,000 is now worth $10,000. If the stock is sold, capital gains tax will be due on the $6,000 gain. Since federal capital gains tax rates range from 10 percent to 20 percent and state tax rates generally range from 5 percent to 8 percent, let's assume your tax bite is 25 percent of the gain, or $1,500. After taxes, you now have $8,500 to give to the charity.

The alternative is to give the stock directly to the charity. Typically, the stock will be sold immediately, resulting in $10,000 going to the charity. You get an income tax deduction for the fair market value of your gift. The result is that the charity gets more ($10,000, not $8,500), and you get a higher income tax deduction. The only party that comes up short is the government since tax is never paid on the $6,000 capital gain!

This seems like a "no brainer" doesn't it? Sorry! Often, it's not that straightforward. For example, suppose that, although highly appreciated, you still like the stock as an investment. Consider giving the stock, anyway. Then, use the cash which you would have given to the charity to replace the stock that you just gave away. Assuming the same facts as above, the charity would still get $10,000 and you would continue to own the stock. The only difference is that your $4,000 basis for determining gain or loss is now $10,000, the cost of the newly purchased stock. Once again, income tax is never paid on the $6,000 gain.

Here is a different situation. Suppose that instead of increasing in value, the stock is worth less than you paid for it. In this case, you should sell the stock and give the cash proceeds. This secures the deductible capital loss for immediate use on your income tax return, plus you get a charitable contribution for the cash given.

Here are some other considerations:

  • In order to qualify for the benefits described above, the property must be of the sort which will result in capital gain for you. For example, gifts of real estate can qualify. (Real estate is often more complicated, however, due to the existence of mortgage debt, depreciation recapture, and property management issues. Gifts of real estate subject to a mortgage can actually result in increased taxes.) Gifts of inventory items, business equipment, and certain other items do not qualify.


  • The assets given must have been held for more than 12 months—short-term capital gain property does not qualify.

  • Contributions deductible in any one year are subject to limitations based on the type of assets given as well as the tax status of the charity. For example, deductible contributions of cash are generally limited to 50 percent of your adjusted gross income while deductions for gifts of appreciated property are limited to 30 percent. Deductions exceeding these limits "carry over" to as many as five future years, subject to the same 50 percent and 30 percent limitations.

  • Contributions of tangible personal property (artwork, antiques, etc.) require special consideration. Generally, to get a deduction for the full market value of this type of property, the use of the property must be related to and used in the charity's exempt functions. For example, giving artwork to a museum or books to a library.

  • Generally, it is not practical to contribute stock in small non-publicly held businesses to charities.

  • Arranging in advance for the sale of property by the charity creates tax hazards. The decision to sell the property must be the charity's, not yours.

  • For contributions of property exceeding $5,000, an appraisal must be obtained from a qualified appraiser. (This requirement does not apply to marketable securities.) Also, for all property contributions, there are special IRS reporting and documentation requirements.

  • Contributions to private foundations are subject to even greater limitations. Advice from qualified tax advisors should be sought for all transactions dealing with private foundations.



As you can tell, this area is not as simple as it first appears. But with the careful guidance of a qualified tax advisor, you can be a blessing to your church or favorite charities and realize sizable tax benefits at the same time.

Copyright Sound Mind Investing, December 1999, Volume 10, Number 12.

"You could have hundreds of dollars sitting at the back of your closet ... " How much will your charitable donations save you on your tax return? Learn more here.
Published with permission from Sound Mind Investing, America's best-selling financial newsletter from a biblical perspective.