Can You Donate Stock Options to Charity?

Donating stock options to charity is a multi-step process, unlike a simple cash contribution. Directly donating unexercised options for tax deductions is generally not straightforward. A common approach involves exercising options first, then donating the resulting shares. This method allows individuals to leverage equity compensation for philanthropy and realize tax advantages.

Understanding Stock Options and Donation Feasibility

Stock options are a contractual right granted by a company, typically to an employee, to purchase shares at a predetermined price (the exercise or strike price) within a timeframe. They are not actual shares, but an opportunity to acquire them. The two primary types are Non-qualified Stock Options (NSOs) and Incentive Stock Options (ISOs), each with distinct tax treatments.

Non-qualified Stock Options (NSOs) are flexible equity compensation for employees, consultants, and board members. They do not qualify for ISO tax treatment and are generally subject to ordinary income tax upon exercise. Granting an NSO typically does not trigger a taxable event unless the option has a readily ascertainable fair market value, which is uncommon for private companies.

In contrast, Incentive Stock Options (ISOs) are statutory options granted exclusively to employees, requiring adherence to specific Internal Revenue Service (IRS) regulations for favorable tax treatment. ISOs generally do not result in ordinary income taxation at exercise for regular tax purposes, though they may trigger Alternative Minimum Tax (AMT) implications. ISOs are non-transferable during the option holder’s lifetime.

Directly donating unexercised stock options to a public charity is generally not feasible for a charitable deduction. For both NSOs and ISOs, the unexercised option’s lack of a readily ascertainable fair market value often prevents it from being a qualified charitable contribution. Therefore, the typical path for philanthropic giving with stock options involves first exercising them to convert them into actual shares.

Exercising and Donating Shares

Translating stock options into a charitable gift begins with exercising them to acquire the underlying shares. Donors have several exercise methods, depending on their financial liquidity and company stock plan rules. A common approach is a cash exercise, where the donor uses personal funds to pay the exercise price. This requires sufficient cash on hand.

Another widely used method is a cashless exercise, allowing the donor to acquire shares without upfront cash. A brokerage firm simultaneously exercises the options and sells a portion of the newly acquired shares. Proceeds cover the exercise price, applicable taxes, and brokerage fees. The remaining shares are then deposited into the donor’s brokerage account, ready for transfer.

Once options are exercised and shares are in the donor’s brokerage account, the next step is transferring them to the chosen charity. This is typically an in-kind donation, meaning shares are given directly, not cash proceeds from a sale. To facilitate this, the donor must coordinate with their brokerage firm and the charity. The charity will provide specific transfer instructions, often including their Depository Trust Company (DTC) information.

Coordination between the donor, brokerage, and charity is important for a smooth and efficient transfer. Donors should allow sufficient time, as the process can take several business days to a week or more, especially with employer-sponsored stock plans. Donating shares directly, rather than selling them and donating cash, can be more tax advantageous, particularly if shares have appreciated.

Tax Implications of Donating Stock

Tax consequences for a donor exercising stock options and donating the resulting shares are important.

Exercising Non-qualified Stock Options (NSOs) triggers ordinary income recognition. The taxable amount, or “bargain element,” is the difference between the stock’s fair market value on the exercise date and the exercise price paid. This income is subject to federal, state, and local income taxes, plus Social Security and Medicare taxes, and is generally reported on the donor’s W-2 form.

In contrast, Incentive Stock Options (ISOs) receive different tax treatment at exercise for regular income tax purposes. No ordinary income is typically recognized when an ISO is exercised. However, the difference between the stock’s fair market value at exercise and the exercise price paid is an adjustment for Alternative Minimum Tax (AMT) calculations. A substantial bargain element from ISO exercise could potentially trigger or increase AMT liability for the donor in that tax year.

After exercising options and acquiring shares, donating them to a qualified public charity can provide a charitable income tax deduction. If shares are held over one year after exercise (long-term capital gain property), the donor can generally deduct the stock’s fair market value on the gift date. This deduction helps offset income recognized from option exercise (for NSOs) or other taxable income. Donating appreciated stock directly avoids capital gains tax on appreciation, which would be incurred if sold first.

The charitable deduction for appreciated capital gain property donated to public charities is subject to Adjusted Gross Income (AGI) limitations. This deduction is typically limited to 30% of the donor’s AGI for the tax year. Any deductible amount exceeding this limit can be carried forward for up to five subsequent tax years. If shares are held less than one year after exercise (short-term capital gain property), the deduction is generally limited to the donor’s cost basis, including the exercise price and any previously taxed ordinary income.

Considerations for Charities

When a charity accepts a stock donation, especially from exercised stock options, internal policies and procedures apply.

Many charities have gift acceptance policies outlining the types of non-cash assets they receive. These policies specify processes for valuing non-cash gifts, managing risks, and determining if the asset will be held or immediately liquidated.

Charities generally prefer publicly traded stock donations due to liquidity. Such shares are readily sold on the open market and converted into cash to fund programs. It is common practice for charities to sell donated shares upon receipt, or soon after, rather than holding them as long-term investments. This approach helps manage market fluctuations and ensures prompt access to funds.

Upon receiving a stock donation, the charity undertakes several administrative steps. These include confirming the shares’ successful transfer into their brokerage account and accurately recording the gift’s fair market value on the date of receipt. This valuation is important for internal accounting and for providing necessary donor documentation.

For a charitable deduction, the charity must provide a written acknowledgment for any single contribution of $250 or more. This acknowledgment must include the organization’s name, contribution date, and a description of the donated property (number and type of shares). For appreciated property gifts exceeding $5,000, the donor typically needs a qualified appraisal, and the charity must sign IRS Form 8283, “Noncash Charitable Contributions,” which the donor attaches to their tax return.