How the Gifting Stock to Charity Tax Deduction Works

Donating stock to a qualified charitable organization can be a tax-efficient way to support causes you care about. This method involves transferring ownership of securities, such as stocks or mutual funds, directly to a charity rather than selling them and donating the cash. By gifting appreciated assets held for more than a year, you can receive a tax deduction for the full market value of the securities while also avoiding the capital gains tax that would have been due if you had sold them first.

Calculating Your Charitable Deduction

The amount you can deduct for a stock donation depends on two main factors: how long you owned the stock and its value. The most beneficial scenario involves donating stock held for more than one year, which is considered long-term capital gain property. In this case, your charitable deduction is equal to the fair market value (FMV) of the stock on the date you transfer it. The FMV for publicly traded stock is calculated as the average of the highest and lowest selling prices on the donation date.

This creates a tax advantage because you receive a deduction for the full value and avoid paying capital gains tax on the appreciation. For instance, if you have stock currently worth $10,000 that you originally purchased for $2,000, you could donate the shares directly. You would be eligible for a $10,000 deduction and owe no capital gains tax, whereas selling the stock first would trigger tax on the $8,000 profit.

The rules are different for stock held for one year or less, known as short-term capital gain property. If you donate short-term stock, your deduction is limited to your cost basis—the amount you originally paid for the stock—not its current market value. This makes donating short-term appreciated stock less advantageous than donating long-term holdings.

It is also not recommended to donate stock that has decreased in value. If you donate depreciated stock, your deduction is limited to its current, lower fair market value. A more effective strategy is to sell the stock to realize a capital loss, which you can use to offset other capital gains, and then donate the cash proceeds from the sale.

Understanding Deduction Limitations and Carryovers

After calculating your donation’s value, you must consider the limits on how much you can deduct in a single tax year. These limits are based on a percentage of your adjusted gross income (AGI). The specific percentage depends on the type of property you donate and the type of charity that receives it.

For gifts of long-term appreciated stock to public charities, such as churches and schools, the deduction is generally limited to 30% of your AGI for the year. For example, if your AGI is $150,000, the maximum deduction you could take for a donation of appreciated stock in that year would be $45,000. Any amount donated above this threshold is not lost.

When your charitable contribution exceeds your AGI limit, you can carry over the excess deduction for up to five subsequent tax years. When using a carryover, you must apply the current year’s eligible donations first before applying any carryover amounts from previous years.

The AGI limits are more generous for other types of donations. If your deduction is based on the cost basis of the stock, such as with short-term holdings, the limit increases to 50% of your AGI. Cash contributions are subject to a 60% of AGI limit.

Documentation and Reporting Requirements

To claim a deduction for gifting stock, you must meet specific documentation and reporting requirements set by the IRS. For any single contribution of $250 or more, you must obtain a contemporaneous written acknowledgment from the charity before you file your tax return. This document must include the name of the charity, the date of the contribution, and a description of the stock you donated.

The acknowledgment must also contain a statement confirming whether the charity provided you with any goods or services in exchange for your gift.

If your total noncash contributions for the year exceed $500, you are required to file IRS Form 8283, “Noncash Charitable Contributions,” with your tax return. The form is divided into sections based on the value of your donated property.

Section A of Form 8283 is used for noncash donations with a total value between $501 and $5,000. On this part of the form, you must provide details about the donated property, including:

• A description of the stock
• The date you acquired it
• How you acquired it (e.g., purchase, gift, inheritance)
• Your cost basis
• The fair market value of the stock and the method you used to determine that value

For donations of non-publicly traded stock valued at more than $5,000, the requirements become more stringent, and you must complete Section B of Form 8283. This section requires a qualified appraisal. If the stock is valued between $5,001 and $10,000, an appraisal is required, but you do not have to attach it to your tax return. For donations of such stock valued at more than $10,000, the qualified appraisal must be attached to your return.