Whenever you sell a security, you trigger a capital gains tax based on the amount of profit you make from the sale. The tax rate depends on whether you held the stock. Short-term capital gains are taxed at your standard tax rate. But with long-term capital gains, the most you’ll typically pay at the federal level is 20%. Whether you held your stock for a short term (less than a year) or long-term (more than one year), that tax rate can add a substantial amount to your tax bill.
But what would you say if we told you that there was a simple way for you to save money on taxes and have a bigger impact on the charities you support? That simple tip: Donate your stock directly to a non-profit rather than cashing out first.
So how can donating stock to charity save you money on taxes? Let's look at an example.
Why You Should Donate Stock Instead of Cash
Let's suppose that you were very fortunate to be a long-time investor at Apple and that you had purchased Apple stock at $50 a share, but it's now at $150 a share. If you have a hundred shares, that means that your Apple stock is now worth $15,000 with a gain of $10,000. That means for a $10,000 gain, depending on the state you live in, you may have a tax bill of over $3,000.
So if you have $15,000 in Apple stock, you have two choices. If you sell Apple stock you could owe more than $2,000 in long-term capital gains taxes, which leaves you with $13,000 remaining to donate to charity.
That's less money for you, but it's also less money for you to donate to charity.
But if you donate the stock, there are four ways you would benefit from this.
#1: Qualify for a capital gains tax exemption
Not only do you get to deduct the fair market value of the donated stock, but you also don’t ever have to pay the long-term capital gains taxes.
So you get a bigger deduction while negating up to 20% tax had you sold the stock. That’s a savings of $2,000! Even if you sold the stock and donated the proceeds to charity, you would still owe taxes on the earnings growth. But by making a direction donation, you completely avoid capital gains tax altogether.
That by itself is a huge benefit, but it gets even better.
#2: Deduct the stock’s fair market value
When you donate the stock to charity, you get a deduction based on the full market value of that stock today. You can deduct up to 30% of your annual income on your tax return this way for donated stocks that you held for more than a year. Why? For long-term held stocks, the IRS allows you to use the fair market value at the time of donation for your deduction, rather than the amount you paid for it.
So if you donate $15,000 of Apple stock, you get $15,000 off your income taxes, which at a 33.3% rate would save you an additional $5,000 in taxes.
#3: Balance an overweighted portfolio
You may be wondering when is the right time to donate highly valued stock from your portfolio. One strategy is to look at your portfolio balance (consider doing this alongside your financial advisor). If an individual stock has grown at a much higher pace than the rest of your portfolio, your asset allocation may be out of line with your target. Selling some of that stock can help you reduce risk, especially if most of it was purchased at a low-cost basis.
#4: Make a difference in a cause you care about
Not everything is about getting a tax break, but by donating stock when you save money on taxes the charity actually gets a bigger donation. Because charities are nonprofit organizations when you donate the stock to them, they also never have to pay the capital gains, so the charity you support gets more resources. Whether you have a specific charity in mind that you want to give to, or you prefer to browse for organizations that are making measurable impacts, growing your wealth gives you the opportunity to be a part of that change in the world.
Use a Donor-Advised Fund to Donate Stock
In order to qualify for a tax deduction, you must make a charitable contribution during that tax year. That can put a lot of pressure on you to vet organizations and make decisions about what areas you want to support with your funds.
There is another catch, it turns out that most charities in the United States don't accept stock donations. In fact, out of the over 1.5 million charities across the US, only a few thousand are set up to take stock directly.
But this is where donor-advised funds like Daffy can help.
When you contribute stock to a donor-advised fund, you get the full tax benefit of making a stock donation, with the flexibility to donate cash to any legal charity in the US, even if they don’t take stock directly. Contributing to a donor-advised fund also lets you transfer those stocks without having to pick charities until you’re ready. Then, once you have a charitable giving plan figured out, you can designate those organizations on your timeline — even beyond the tax year in which you took a deduction.
Donate Stock with Daffy
Donating stock is truly a win for you and a win for the organizations you care about. And the good news is that it’s easy to initiate a stock transfer from your brokerage to Daffy. It only takes five steps and once the stock arrives, we’ll liquidate the funds and invest them in the portfolio of your choice, so you can continue to grow your balance before picking your favorite charitable causes.
So if you’re looking to lower your tax bill and maximize your generosity, donate stock with Daffy today.
Please note that the information contained is for educational purposes only and should not be considered tax or investment advice.