There’s a stock market adage, “Sell in May and go away,” suggesting that investors bail on stocks in the summer months, when returns tend to moderate, and reinvest in the fall (Investopedia). Savvy donors are choosing to gift their shares in public companies to charity as an efficient way to avoid taxes (legally). We are proud to be partnering with DonateStock, an innovative philanthropy-tech company that is revolutionizing the ease with which our fundholders can give stock to charity.
Steve Latham, CEO of DonateStock and Brent Sullivan, President of Tax Alpha, LLC wrote the following article, which I’m pleased to share with you:
With the market hovering near all-time highs, millions of investors are eyeing their unrealized gains. If you own one of the many outperforming stocks (view the full list here!) you may be thinking about how to:
- Mitigate risk: as we’ve all learned, what goes up can go down quickly.
- Reduce concentration: too much of one stock can impact your entire portfolio.
- Minimize taxes: selling the stock will likely trigger a substantial tax on the gain.
Basic strategy of stock gifting
As you are likely aware, you can avoid long-term capital gains tax while maximizing tax deductions through charitable stock gifting. As a quick refresher, the example below shows how the tax savings can stack up.
Let’s say you bought 10 shares of Nvidia in 2021 at $150 per share, or $1,500. At today’s price (near $900) you’d have an unrealized gain of $7,500 or 500%. If you sell the stock, you’d pay federal and state taxes on the gain. Depending on where you live, that can result in taxes of up to 36%.
The good news is you can save a lot by donating stock held for more than one year. Based on the assumptions below, donating shares worth $9,000 could avoid $2,000 in capital gains tax and save $3,150 in income tax by itemizing the deduction. This adds up to $5,150 (4.3x the original investment) in value created by donating stock.
Some make the costly mistake of selling stock and donating the after-tax proceeds. Per below, donating (vs. selling) the stock would save $2,700 in taxes while increasing proceeds to the recipient by $2,000.
Bonus Tip: How to keep even more of your gains
Maybe you aren’t ready to part with your stock and would prefer to donate cash instead? Unbeknownst to most, here’s a clever way to extend the benefits of stock gifting to reduce taxes today and in the future.
Simply donate the appreciated stock and repurchase the same number of shares with cash. As the Wash Sale rule doesn’t apply to stock gifts or capital gains, you can capture the tax savings above while stepping up the cost basis of your shares. This will reduce your future tax liability when you sell the stock.
If you donate and repurchase the shares at $900 per share and sell at $1,500 at least one year from now, you could save another $2,000 in taxes simply by increasing your cost basis from $150 to $900. The savings are illustrated below:
To sum it up, stock gifting offers a unique opportunity to harvest gains, reduce concentration and avoid taxes (legally) today and in the future. Moreover, the nonprofit you support gets to keep the proceeds that would have otherwise been paid in taxes had you sold the stock. When you donate stock, everyone wins!
While stock gifting used to be a painstaking experience, it’s now fast, safe and cost effective to donate stock – and you can give to your DAF at DJCF/SWCF through Donate Stock! Dallas Jewish Community Foundation (DJCF) | DonateStock
Disclaimer: the author is not a financial advisor, and this article does not constitute financial advice. Please consult a tax professional before acting.
