The Double Tax Advantage of Donating Appreciated Stocks Directly

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If you own stocks in a taxable brokerage account and make charitable donations, consider donating your stocks this year instead of just writing a check. Why? Given the all-time market highs, your stocks, mutual funds, and/or ETFs probably have unrealized capital gains. When you donate an appreciated security that you’ve held for at least a year, you’ll both avoid paying long-term capital gains tax AND get a tax deduction for the full current market value.

This HCR Wealth Advisors graphic shows the benefit using the example of donating $50,000 of stock to charity with an original cost basis of $30,000. It assumes the highest long-term capital gains tax rate of 23.8% (20% plus the 3.8% Medicare surtax for high-income earners).

Here is a similar graphic from Fidelity using the example of donating $50,000 of stock to charity with an original cost basis of $20,000.

The size of your benefit is your unrealized gain times your tax rate. This basic idea still applies if you’re only donating a smaller amount of stock at the lower long-term capital gains rate of 15%. If you bought a stock for $1,000 and it’s now worth $2,000, donating it directly will save you $150 to $238 in taxes ($1,000 x 15% or 20% or 23.8%). If someone didn’t know and simply changed the order (sell stock, then immediately donate the cash proceeds), that tax savings would disappear.

The problem is that not all individual charities are equipped to accept such stock donations. That’s where donor-advised funds (DAFs) come in handy. Fidelity, Vanguard, and Schwab all have donor-advised funds that can accept such donations, get you that tax deduction upfront, and allow you to make a cash grant to your individual charities. DAFs do charge for their services – an administration fee of about 0.60% of assets annually on top of investment expense ratios. There is also a minimum initial donation of between $5,000 and $25,000. You can then weigh the options of investing your donations for growth, or distributing it immediately to charities for immediate impact.

I am fortunate to have some appreciated stocks, so this year I plan to open an account with Fidelity Charitable. I chose them because they seem to have been in the game the longest and are also the most flexible with a $5,000 minimum initial donation, no minimum requirement for future donations, and a low $50 minimum grant size. Their administrative fees are also comparable with Schwab and Vanguard. I hope that I can finish the process by year-end.

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Comments

  1. So in the first example, do I also get a 50k itemized write off?

  2. I’ve donated stock, but am taking the standard deduction. Do I even need to enter the stock donation into my tax software? (The transfer of stocks did not appear on the 1099 from my brokerage. Perhaps it never does.) That is, do I need to tell the IRS about it, if I’m not itemizing? From their perspective, if they were to ever audit my brokerage account, they would just see “Security Transfer Out” without me ever declaring where those shares went. Is that a problem?

    Without itemizing it, I’ve still obtained the tax benefit of avoiding capital gains on long-held AAPL shares.

    • I suppose it doesn’t matter if you enter it onto your tax return (if you don’t need the tax deduction part), but I would still keep the paperwork evidence of your donation, just as you might with any other audit.

      My donation of appreciated stock to Fidelity DAF went smoothly, and I’ll probably do it again.

      • OK, great. That makes sense. Thanks for the response!

        FWIW while researching this I found a company that will handle this for you, accepting your stock and giving cash to your charity (minus a fee of up to 2.75%). I can’t vouch for them at all, but it may be an interesting option if your intended charities don’t accept direct transfers. https://www.cocatalyst.org/

  3. Why did you cross Schwab in the above article. I thought Schwab DAF is similar to Fidelity?

    • That’s just my automated broken link checker, sometimes it has false positives. I do think Schwab Charitable is fine, especially if all your other assets are already at Schwab.

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