One of the most tax-savvy moves a donor can make is to use appreciated stock to fund charitable gifts. Reason: If you have owned the stock for more than one year, you can take a deduction based on the stock’s full fair-market value and you don’t have to pay tax on any of your paper gain.
Example: Hal, a faithful supporter of our mission, typically makes a $10,000 annual gift to assist with our operating expenses. In past years he has written a check and has taken a $10,000 deduction when he files his income taxes.
Hal has enjoyed watching several of his stock holdings go up in value as the market has risen in recent months. This year, after talking with a member of our staff and his financial advisor, Hal decides to use shares of XYZ, Inc. he bought three years ago for $2,500 and which are now worth $10,000 to make his annual gift. As a result, Hal generates a deduction for $10,000 and avoids capital-gain tax on the $7,500 the stock has appreciated since he bought it.
Obviously, the stock has performed well since Hal bought it—quadrupling in value in just three years. What if Hal believes the stock still has significant upside potential and is reluctant to part with it? Should he revert to his previous practice of writing a check?
Hal is still better off to give the stock in almost all cases, and the reason is simple: he can turn around and immediately repurchase an equal amount of the stock he gives away using the cash he originally planned to use to make his gift.
How does this help him? Not only does he get to deduct the full value of the stock and avoid tax on his gain, he gets to continue owning that stock—but with a higher cost basis. That is important because it raises the threshold for measuring any taxable gain or loss when he sells the stock in the future.
Assume he holds the stock for two more years and sells after it doubles in value to $20,000. Because he gave away the original stock for which he paid $2,500 and repurchased it for $10,000, his taxable gain at that time will be just $10,000 ($20,000 - $10,000) not $17,500 ($20,000 - $2,500).
Even if Hal is wrong and the value of the stock drops, he is still better off than if he had not used the stock to make his charitable gift to us. For instance, if Hal sells after the value of the stock drops to $7,500, he realizes a $2,500 capital loss ($10,000 - $7,500) that he could use to offset capital gain in other investments. Capital loss can also offset ordinary income up to $3,000 each year if capital loss exceeds capital gain. Had he held on to the original shares and then sold, instead of a $2,500 loss that could reduce his taxable income he would have had to recognize a $5,000 gain ($7,500 - $2,500).
Contemplating a significant gift? We would be delighted to talk with you and your advisors to identify the best assets to fulfill your charitable objectives.
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