How To Avoid Taxes on Charitable Donations By Giving Stock

If you’re considering making a cash donation to a charity, see if you can donate appreciated stock instead. It’s likely that your charity will accept the appreciated stock and you’ll save money on taxes in the process.

Donating appreciated stock to charity

If you’ve held stock for over a year that has appreciated in value, you can donate it to a charity and neither you nor the charity has to pay capital gains taxes when the stock is sold. Additionally, you can use the full market value of the stock as the amount of your charitable tax deduction.

For example, you own stock at a current market value of $1,000 which you purchased for $600. If you donate it to charity, the charity receives the $1,000 value and you do not have to pay capital gain taxes on the $400 gain. Additionally, you can take a $1,000 charitable tax deduction. The savings are $400 × your capital gains tax rate.

Assuming you had $1,000 cash, you can donate the stock to charity on Day 1 and then buy the same stock on the same day without triggering any penalties. Now your cost basis in the stock is $1,000.

Show me the math

Let’s run through two hypotheticals.

Hypothetical 1. Christine has the following set of facts:

• Adjusted Gross Income: $100,000
• $1,000 in stock (purchased over a year ago for $600).
• $1,000 in cash.

She uses her cash to make a $1,000 tax-deductible contribution to charity. Assuming she itemizes deductions, she saves $280 in taxes ($1000 deduction × 28% marginal tax rate). Later, she sells her stock for $1,000 and pays a capital gain tax of $60 ($400 capital gain × 15% capital gain tax rate). She saves $280 in taxes on the charitable donation and pays $60 in capital gains taxes for a net savings of $220.

Hypothetical 2. Bill has the same set of facts:

• Adjusted Gross Income: $100,000
• $1,000 in stock (purchased over a year ago for $600).
• $1,000 in cash.

He donates the $1,000 in stock to charity. Neither him nor the charity pay capital gains tax. Assuming he itemizes deductions, he saves $280 in taxes from the charitable donation ($1,000 deduction × 28% marginal tax rate). The next day he uses the $1,000 in cash to purchase the stock. His basis in the stock is now $1,000. He will only pay future capital gain taxes on the difference between his cost basis of $1,000 and the future value of the stock. His savings is $280.

Doesn’t the wash sale rule apply to charitable contributions?

No. You may be familiar with the concept of a wash sale. A wash sale occurs when you sell stock at a loss and, within 30 days before or after the sale, you buy substantially identical stock. The result is that you can’t deduce losses from your income that relate to wash sales.

As an example, Christine paid $1,000 for stock that has a market value of $800. She sells the stock and incurs a $200 loss, but then the next day repurchases the stock for $800. Christine cannot deduct the $200 loss on the sale of the stock. However, she can add the loss to the cost basis of her new stock, raising such cost basis from $800 to $1,000.

In order for an investor to order a wash sale, and to make the loss deductible, you cannot have a purchase of substantially identical stock within the 30 day window before or after the sale.

Back to our charitable contribution hypothetical: The wash sale rules apply to stock which is sold. The rules do not apply to stock donated to charity. The rules also do not apply to gains. Therefore, you can donate an appreciated stock to charity and then buy the stock with cash at the same time.

Gifting appreciated stock to individuals

There’s another way you can avoid paying taxes on capital gains worth discussing, although it’s not as easy as the charitable donation example.

You can give up to $14,000 in 2016 to any number of individual people without incurring federal gift taxes. If you’re married, you and your spouse can each give $14,000. These annual gifts don’t count against your lifetime gift tax exclusion.

Unfortunately, gifting appreciated stock to individuals does not reset your original cost basis. The recipient of the gift assumes the original cost basis in the stock, but the gains might not be taxed if the recipient is in the 10% or 15% income-tax bracket. For taxpayers in the 10% and 15% income tax brackets, the long-term capital gain tax rate is 0%.

Here’s another example. You purchase stock for $1,500 which is now worth $4,000. You gift the appreciated stock to your brother, who is in the 15% federal income-tax bracket. He sells the stock for $4,000. The $4,000 is below the annual gift exclusion level of $14,000. Your brother will not pay capital gain tax on the $2,500 of gain because his capital gain tax rate is 0%. Keep in mind that your parents might have to pay taxes on behalf of your brother if the Kiddie Tax applies.

Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He knows that the Bogleheads forum is a great resource for tax questions and is always looking for honest advisors that provide good advice for a fair price.