Donating stock you have owned for more than a year gives the charity more money and costs you less than selling the shares and writing a check. Transfer them directly and no capital gains tax is triggered on the growth, the charity sells them tax free because it is exempt, and your deduction is based on what the shares were worth on the day they moved.
Why the Shares Beat the Cash
Suppose you bought $4,000 of a stock several years ago and it is now worth $10,000, and you want a charity to have it.
Sell first and you realize $6,000 of long-term gain. Federal capital gains tax comes off that growth, higher earners can owe the net investment income surtax on it as well, and the charity gets whatever is left. Transfer the shares instead and there is no sale by you, so there is no gain to tax. The charity is exempt, so when it sells there is no tax at that end either. The whole $10,000 goes to work.
| Sell the shares, then give the cash | Transfer the shares | |
|---|---|---|
| Tax on the growth | You owe capital gains tax on the gain | No sale by you, so no gain to tax |
| What the charity receives | What is left after the tax | The full market value |
| What you can deduct | The cash you handed over | The market value of the shares |
| Who pays tax when the shares are sold | You do | Nobody. The charity is exempt |
The whole advantage is the size of the built-in gain. Shares that have barely moved are worth no more to give than cash is. The position you bought years ago and never touched is the one to look at.
Shares that have lost money are the opposite case
If the stock is worth less than you paid, do not give it away. Sell it yourself, claim the capital loss on your own return, and donate the proceeds. Handing over a loss position gives the loss to an organization that cannot use it.
The One-Year Line
Everything above depends on the holding period. Stock held for more than one year is long-term, and a long-term gift is deductible at