The Tax Benefit of Donating Securities Instead of Cash
If you’re charitably inclined and looking for a way to minimize taxes, learn how donating securities can be even more beneficial than donating cash.
There are two ways that donating securities is a tax-smart strategy.
- It can reduce your taxable income in a given year
- It can reduce your capital gains in the future
That first benefit is true of donations in general, but the second is specific to donating securities.
The Tax Deduction Benefit
In order to be eligible to receive a tax deduction from a security donation, the security has to have been held for one (1) year or longer. Once this requirement is satisfied, the fair market value of the security at the time of the donation is tax-deductible so long as you itemize.
This is the same exact treatment that cash donations receive, but when you donate securities instead of cash, you get to keep your cash, which will come into play later. For now, let’s consider an example.
- You have 100 shares of a security
- You purchased those shares for $125 each; your cost basis is $12,500
- Those shares are now worth $300 each; your position’s value is $30,000
If you give away 20 shares to charity, the fair market value of your donation is $6,000 and this is the amount that will be deductible from your taxable income. The charity that receives your donation will receive the shares worth $6,000 and can sell them for the cash value tax-free. It’s a win for both parties.
Benefit Beyond the Tax Deduction
Recall that in order to receive a tax deduction for a donation, whether cash or security, you must itemize. This has become far less common following the 2017 Tax Cuts & Jobs Act. That legislation nearly doubled the standard deduction, which eliminated the benefit of itemizing for many. Even so, if you don’t receive a tax deduction for your security donation, there is still a tax benefit to be had. To obtain it, you need to replace the security you gave away.
From the example above, consider your position after 20 shares were donated to charity:
- You now have 80 shares of the security
- You purchased those shares for $125 each; your cost basis is now $10,000
- Those shares are worth $300 each; your position’s value is now $24,000
If you use the $6,000 of cash that you retained when you chose to donate securities instead of cash, you can buy 20 new shares of the same security you just gave away. In doing so, those shares will increase your cost basis in the position, which will reduce any potential capital gains tax liability in the future.
Continuing our example, consider the following after shares were repurchased following the security donation:
- You have 100 shares of the security again
- You purchased 80 shares for $125 each and 20 shares for $300 each; your cost basis is now $16,000
- Those shares are worth $300 each; your position’s value is $30,000 again
By the end of this transaction, your account value is the same as it was before your donation but is in fact better off because you have a higher cost basis. If you sell your entire position, your capital gain will be $14,000 instead of the $17,500 it was prior to your donation. By continuing this strategy year after year, you can raise your cost basis and minimize taxes if you decide to liquidate your position in the future.
Tax-smart strategies like security donations are ways to reduce your tax liability on income and capital gains. If you’re charitably inclined and want to learn more, so that you can give and reduce taxes in the process, please contact us.