Why Should You Donate Stock Instead of Cash?
Donating appreciated stock is a financially efficient way to support causes, potentially creating a greater impact for both you and the receiving organization.
While writing a check is a familiar method for charitable giving, donations can be made using a variety of assets. Donating non-cash assets, such as stocks, is an alternative to traditional cash gifts that can provide benefits for both the donor and the recipient organization.
The Primary Tax Advantage of Donating Stock
The benefit of donating stock directly to a charity is a tax advantage. Donors avoid paying capital gains tax on the stock’s appreciation and can claim a charitable deduction for the stock’s full fair market value. This allows a donor to give more and reduce their tax liability.
For example, consider stock valued at $10,000 that was purchased for $2,000 and held for over a year. If the owner sells the stock first, they realize an $8,000 capital gain. Assuming a combined federal tax rate of 23.8% on that gain, they would owe $1,904 in taxes. After paying the tax, only $8,096 is left to donate, which becomes the amount of their charitable deduction.
If the owner donates the $10,000 of stock directly to the charity, they avoid the $1,904 capital gains tax. The donor is also eligible for a charitable deduction for the stock’s full fair market value of $10,000. As a tax-exempt entity, the charity can sell the stock and receive the entire $10,000.
Donating the stock directly results in a larger donation to the charity ($10,000 vs. $8,096) and a larger tax deduction for the donor. The donor also saves $1,904 by not paying capital gains tax.
Requirements for a Qualified Stock Donation
For a stock donation to receive favorable tax treatment, several conditions must be met.
- Holding Period: The stock must be a long-term capital asset, meaning the donor has owned it for more than one year before donating. For stock held one year or less (a short-term holding), the deduction is limited to the donor’s cost basis—what they originally paid—not its current fair market value.
- Qualified Charity: The recipient organization must be a qualified charity, such as a 501(c)(3) public charity, to enable the maximum deduction. Donors should confirm the organization’s tax-exempt status, as rules for private foundations are more restrictive.
- AGI Limits: The deduction for donations of long-term appreciated property to public charities is limited to 30% of the donor’s Adjusted Gross Income (AGI). If a donation’s value exceeds this limit, the IRS allows the donor to carry over the unused portion for up to five subsequent tax years.
- Valuation: The donation’s value is its Fair Market Value (FMV) on the date the transfer officially occurs. For publicly traded securities, this is the average of the high and low trading prices on the day the charity receives the shares into its account, which determines the deduction amount.
The Stock Donation Process
The donation process begins by contacting the intended charity to confirm it is equipped to accept stock donations. The organization will then provide the necessary information to facilitate the transfer, including its brokerage firm’s name, account number, and Depository Trust Company (DTC) number.
Next, the donor instructs their broker to transfer the shares using the charity’s information. This is done by submitting a letter of authorization or a form from the brokerage firm, often through an online portal. The instruction must specify the stock and the number of shares to transfer.
An alternative is to use a Donor-Advised Fund (DAF), which is useful for supporting multiple organizations. A donor contributes stock to the DAF and claims an immediate tax deduction. The DAF sponsor liquidates the stock, and the donor can then recommend grants from the fund to various charities over time.
Tax Filing and Substantiation
To claim the deduction, a stock donation must be reported on a federal tax return. For noncash contributions totaling more than $500 for the year, the taxpayer must file IRS Form 8283, Noncash Charitable Contributions, with their Form 1040.
To complete Form 8283, the taxpayer needs the charity’s name and address, a description of the stock, the acquisition date, the cost basis, and its fair market value on the contribution date. The contribution date is when the shares are transferred to the charity’s account.
The IRS also requires a contemporaneous written acknowledgment from the charity for any single contribution of $250 or more. This receipt must include the charity’s name, the contribution date, and a description of the donated stock.
While noncash donations over $5,000 require a qualified appraisal, this is waived for publicly traded securities like stocks because their value is easily found from market quotes. An authorized officer of the charity may still need to sign Form 8283.