The Case for Donating Stock Instead of Cash
If you are looking to contribute to a cause and have a portfolio of stocks, consider donating stock directly to charity rather than cash. You will avoid the capital gains liability that you would owe on the shares if you sold them, and this will maximize the tax deductions you are allowed to take. This is how it works.
Stock donation saves you money
When you sell shares through a brokerage account, you must pay taxes on any capital gains based on the difference between the selling price and the amount you paid for the shares when you first invested in them. Taxes depend on your taxable income and how long you own the shares:
- A tax on short-term capital gains applies to profits from assets sold within a year or less. The tax rates for short-term capital gains are the same as your regular tax category – up to 37%.
- Tax on long term capital gains applies to profits from the sold asset held for over a year. Tax rates are 0%, 15% or 20% depending on your taxable income and registration status .
As you can see, long-term capital gains tax rates are more favorable, so holding the stock for more than a year is usually a good idea for most investors (unless the investment aligns with your investment goals, of course).
But here’s the twist: By donating shares directly to charities, you avoid paying all of the capital gains tax described above for the tax year in which they were donated, since the donation does not count as a sale. In this case, for a long-term investment, savings of up to 20% on an investment of tens of thousands of dollars is very significant.
In addition, if you have held an asset for more than a year, you still have the right to deduct the full market value of the donated asset from income tax 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 (that is, the amount you originally paid for the stock).
How to donate stocks to charity
Your first step is to contact the charity and see if they have a brokerage account that can accept donated shares. If they do, request their brokerage account information and share it with your financial institution, which can process the exchange for you after you sign some of the permits.
The extra return on investment extends to your charity – a charity can sell your donated shares tax-free on unrealized profits as the charity is tax-free.
What if you have stocks that are selling for less than what you paid for them? In this case, based on the interest rate , it is usually better to sell first than donate money 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 in excess of this amount can be carried over to future years ) .