If you are looking to give to a good cause and you own a portfolio of stocks, consider donating stocks directly to charity instead of cash. You’ll avoid the capital gains liability you’d owe on the stock if you sold it, and it will maximize the tax deduction you’re allowed to take. Here’s how it works.
Donating stocks saves you money
When you sell stocks in a brokerage account, you owe taxes on any capital gains based on the difference between the sale price and what you paid for the stock when you first invested in it. The taxes are based on your taxable income and how long you’ve owned the stock:
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As you can see, long-term capital gains tax rates are more favorable, which is why holding onto a stock for more than a year is generally a good idea for most investors (unless, of course, the investment does not otherwise align with your investing goals).
Here’s the twist, though: by donating stocks directly to charities, you avoid all of the capital gains tax described above for the tax year they were donated, as a donation is not considered a sale. In this case, for a long-term investment, saving up to 20% on an investment of tens of thousands of dollars is quite significant.
Plus, if you’ve had your asset for more than a year, you’re still eligible to deduct the full fair-market value of the asset donated from your income taxes, up to 30 percent of your adjusted gross income. In contrast, short-term capital gains deductions are less valuable—50% of your AGI, and the asset is deducted at cost (i.e., what you originally paid for the stocks).
How to donate your stocks to charity
Your first step is to contact the charity and see if they have a brokerage account that can accept donated stocks. If they do, ask for their brokerage account information and share that with your financial institution, which can process the exchange for you after you sign some authorization paperwork.
The added bang for your buck extends to your philanthropy, too—the charity can sell your donated shares without having to pay taxes on the unrealized gain because the charity is a tax-exempt entity.
What if you’re holding a stock that’s trading for less than you paid for it? In that case, per Bankrate, it’s usually better to sell first before donating the cash to charity, as this allows you to offset other capital gains and deduct net capital losses of up to $3,000 per year (although losses exceeding that amount can be rolled over to future years).
