How to Make a Charitable Donation of Appreciated Stock

A charitable donation of appreciated stock involves giving shares that have increased in value directly to a qualified charitable organization. This method is a common strategy for individuals to support causes they care about while managing their finances in a tax-efficient manner. Instead of selling the valuable securities and then donating the cash proceeds, the donor transfers the ownership of the stock itself to the nonprofit entity. This process is distinct from cash donations because it involves an asset that has grown in monetary worth since it was first acquired.

Tax Advantages of Donating Appreciated Stock

The main financial benefit for donating appreciated stock is the avoidance of capital gains tax. When an individual sells an asset that has increased in value, they are required to pay tax on the profit, or capital gain. By transferring the stock directly to a qualified 501(c)(3) organization, the donor is not the one selling the asset, and therefore, no capital gains tax is triggered.

Consider an investor who purchased stock several years ago for $2,000 that is now worth $10,000. If the investor sold the shares, they would realize an $8,000 capital gain. This profit would be subject to long-term capital gains tax, with federal rates depending on the donor’s taxable income. By donating the stock directly, the donor avoids this tax liability, and the charity receives the full $10,000.

A second benefit is the ability to take a tax deduction for the full fair market value (FMV) of the stock. In the previous example, the donor could claim a charitable deduction of $10,000, not just their original purchase price. This deduction reduces the donor’s taxable income for the year if they itemize deductions.

These two advantages work together as a financial strategy. The donor avoids a tax liability on the investment’s growth while also receiving a deduction for the asset’s current market value. This combination means the net cost of the donation is lower, allowing them to give more to the charity.

Contribution Rules and Deduction Limits

A central regulation is the holding period of the stock. To qualify for deducting the stock’s full fair market value, the donor must have owned the asset for more than one year, classifying it as long-term capital gain property. If held for one year or less, the deduction is limited to the donor’s cost basis.

The Internal Revenue Service also imposes limits on the deduction a person can claim, based on their adjusted gross income (AGI). For donations of appreciated stock to public charities, the deduction is capped at 30% of the donor’s AGI. This means a person with an AGI of $200,000 could deduct up to $60,000 in such donations.

If a large donation exceeds the annual AGI limit, donors do not forfeit the excess deduction. The tax code includes a five-year carryover provision. This allows an individual to carry forward any unused portion of the deduction for up to five subsequent tax years.

Required Information and Documentation

Before initiating a stock donation, a donor must gather specific information. This includes details about the stock and the charity’s brokerage information:

• The stock’s name and ticker symbol
• The number of shares being gifted
• The original acquisition date and cost basis
• The charity’s brokerage firm name, account number, and Depository Trust Company (DTC) number

For any noncash charitable contribution valued at more than $500, the IRS requires the donor to file Form 8283, Noncash Charitable Contributions. This form must be attached to the donor’s federal tax return. The donor will use the gathered information to complete the form, providing a description of the property and its fair market value.

For any single contribution of $250 or more, the donor must obtain a written acknowledgment from the charitable organization. This receipt must include the name of the charity, the date of the contribution, and a description of the donated stock. It must also state whether the charity provided any goods or services in exchange.

The Stock Transfer and Filing Process

Once all necessary information has been collected, the donor can proceed with the transfer. The process is initiated by formally instructing the brokerage firm holding the shares to move them to the charity’s account. This is accomplished by completing a transfer form from the broker or submitting a signed letter of authorization.

After submitting the transfer request, the donor should follow up to ensure the transaction is completed. It is advisable to verify with the brokerage firm that the shares have moved from the donor’s account. The donor should also confirm with the charitable organization that it has received the shares.

The final step occurs during tax season. The fully completed Form 8283, which details the noncash contribution, must be attached to the donor’s federal income tax return for the year in which the donation was made. This form, along with the written acknowledgment from the charity, substantiates the charitable deduction claimed.