Charitable Giving: Donating Appreciated Securities

Introduction

Donating appreciated securities means gifting stocks, ETFs, or other investments that have risen in value to a qualified charity instead of selling them first. This strategy can both increase the value of your gift and create tax advantages for you by avoiding capital gains tax and unlocking a charitable deduction.

Why does this matter to you as an investor? If you hold long-term winners like $AAPL or $MSFT with low cost basis, donating the securities directly often gives a bigger net benefit than selling and donating the cash. Want to reduce taxes while supporting causes you care about?

In this article you'll learn how the mechanics work, when to use donor-advised funds versus charitable remainder trusts, documentation and IRS rules to watch, and concrete examples showing the math. You will get practical steps you can apply to your portfolio and pitfalls to avoid.

• Donating long-term appreciated securities to a public charity lets you deduct fair market value and avoid capital gains tax, subject to AGI limits.
• Donor-advised funds (DAFs) provide immediate tax deductions with flexible grant timing, making them useful for tax planning and year-end giving.
• Charitable remainder trusts (CRTs) let you convert appreciated assets into income while deferring or eliminating capital gains tax and supporting charities later.
• Document transfers carefully, use Form 8283 when required, and confirm a charity's procedures for accepting securities by DTC or broker transfer.
• Compare scenarios with numbers: donating stock directly usually outperforms selling then donating, especially when long-term capital gains rates and NIIT apply.

How Donating Appreciated Securities Works

The basic idea is simple: instead of selling an appreciated investment and generating a taxable gain, you transfer the security directly to a qualified 501(c)(3) public charity. The charity can sell the security without incurring capital gains tax because charities are tax-exempt. You get a tax deduction and you avoid the capital gains tax you would have paid if you sold first.

Important IRS rules that affect the math include the holding period and deduction limits. Securities must generally be long-term holdings, owned for more than one year, to qualify for a fair market value deduction. If you held them for one year or less, your deduction is limited to your cost basis, not the current market value.

AGI limits and carryforwards

For donations of long-term appreciated publicly traded securities to a public charity, your deduction for the fair market value is generally limited to 30% of your adjusted gross income, with a five-year carryforward for any excess. If you exceed those limits you can carry forward unused deductions for up to five years.

If you give to a private foundation rather than a public charity the limits are tighter. For private foundations, the deduction for appreciated securities is typically limited to 20% of AGI for the fair market value option. Knowing the type of recipient matters when planning large gifts.

Donor-Advised Funds: Fast, Flexible, Tax-Efficient

Donor-advised funds are charitable accounts you fund with cash or securities, receive an immediate tax deduction, and then recommend grants to charities over time. DAFs are popular because they combine simplicity, immediate tax impact, and multi-year flexibility for grantmaking.

How DAFs handle appreciated securities

You can transfer appreciated securities into a DAF in-kind. The fund typically sells the securities internally without capital gains tax and credits your account with the full proceeds. You get a charitable deduction for the fair market value at the date of donation, subject to the 30% of AGI rule for public charities.

DAFs are especially useful if you expect a high-income year or want to bunch deductions into one year for tax optimization. You can also spread grants out later to multiple nonprofits while having already captured the tax benefit.

Practical considerations

Not all DAF sponsors accept all securities, so check liquidity and transfer instructions before initiating. Many DAFs accept major publicly traded stocks and ETFs via DTC transfer from your broker. You'll want to notify the fund and provide the broker details to avoid delays.

One limitation: once you contribute assets to a DAF you can't reclaim them for personal use. Grants should be recommended to legitimate charities, and the DAF sponsor has final approval authority under IRS rules.

Charitable Remainder Trusts: Income Now, Charity Later

A charitable remainder trust is an irrevocable trust that holds assets, pays income to you or designated beneficiaries for life or a set term, and then distributes the remainder to one or more charities. CRTs come in two common forms: the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT).

Why use a CRT?

If you want current income from highly appreciated, low-yield assets, a CRT allows the trust to sell those assets without immediate capital gains tax. The trust reinvests the proceeds and pays you an income stream, while you receive an upfront partial charitable deduction based on the present value of the remainder interest that will ultimately go to charity.

CRATs pay a fixed dollar amount each year, while CRUTs pay a fixed percentage of the trust’s annually revalued assets. Which one fits you depends on whether you prefer predictable payments or payments that can grow with investment returns.

Key rules and trade-offs

CRTs are irrevocable and involve setup costs and administration. Under IRS Section 664, the remainder interest must meet minimums, including a present value generally at least 10% of the initial gift. The partial charitable deduction reduces taxable income in the year of funding, but CRTs are more complex and often suit donors making large, concentrated gifts.

A CRT may be preferable if you want an income stream, are willing to lock the arrangement in, and want to convert low-yield or concentrated positions into diversified investments without the immediate tax hit from selling.

Practical Steps and Documentation

Follow a disciplined process when donating appreciated securities so you preserve tax benefits and avoid delays. Here are the typical steps you should take.

1. Identify candidate holdings, focusing on long-term appreciated assets with low cost basis, and confirm the holding period is over one year.
2. Contact the receiving charity, DAF sponsor, or your attorney for a CRT to confirm they accept donations of securities and to get transfer instructions.
3. Initiate an in-kind transfer via your broker using DTC instructions or by re-registering the shares to the charity's account. Notify both the broker and the recipient to coordinate the transfer date.
4. Record the fair market value on the date of transfer and obtain a written acknowledgment from the charity that includes the date, number of shares, and statement about whether goods or services were provided in return.
5. File required tax forms, typically Form 8283 for noncash gifts when the deduction is more than $500, and keep trade confirmations and the charity's letter for your records.

For public securities, a qualified appraisal generally is not required to substantiate the value, but Form 8283 must be completed when the deduction is over $500 and additional signatures are needed when the deduction exceeds $5,000. Check current IRS guidance or your tax advisor for thresholds and documentation nuances.

Real-World Examples

Example 1, direct gift versus sell-and-donate: Suppose you purchased $AAPL shares years ago for $10,000 and they are now worth $100,000. If you donate the stock directly to a public charity you can generally deduct $100,000 and avoid paying capital gains tax on the $90,000 gain.

If you instead sold the stock in a 15% long-term capital gains bracket you would pay $13,500 in tax, leaving $86,500 to donate. Donating the appreciated shares directly increases the amount the charity receives by $13,500 while also preserving your deduction for the full fair market value, subject to AGI limits.

Example 2, donor-advised fund timing: You have a high-income year and want to reduce your tax bill now but you don't know which charities to support long-term. You transfer $150,000 of appreciated ETFs into a DAF, take the immediate deduction for fair market value, and then recommend grants over the next several years when you decide which organizations to support.

Example 3, CRT for concentrated position: You hold $1,000,000 of a single company with a very low basis and minimal dividends. By funding a CRT with these shares, the trust sells them tax-free, provides you an income stream of, for example, 5% annually, and ultimately transfers the remainder to your chosen charities. You diversify the proceeds, get immediate partial deduction benefits, and avoid an immediate capital gains hit.

Tax Considerations and Limits to Watch

Key tax items to keep top of mind are capital gains tax rates, the net investment income tax, and charitable deduction limits tied to AGI. Long-term capital gains rates for individuals are generally 0%, 15%, or 20%, depending on taxable income, and higher earners may also face a 3.8% net investment income tax on top of that.

When you donate appreciated securities, you typically avoid the capital gains tax you would have paid if you sold the asset first. Your charitable deduction for long-term appreciated public securities is usually capped at 30% of AGI. Any unused deduction may be carried forward for up to five years.

Remember that short-term holdings, those owned for one year or less, are treated differently. If you donate short-term appreciated securities your deduction is generally limited to your cost basis, so it's usually more tax-efficient to wait until the holding period exceeds one year when possible.

Common Mistakes to Avoid

• Donating without verifying the charity accepts securities, which can delay or block the transfer. How to avoid: contact the charity or DAF sponsor first and get transfer instructions.
• Selling first and donating cash, which triggers capital gains taxes and reduces the gift. How to avoid: transfer securities in-kind when the charity accepts them.
• Failing to document the gift properly, such as missing Form 8283 or a written acknowledgment. How to avoid: keep broker confirmations and the charity’s letter and file required IRS forms.
• Donating short-term appreciated assets and claiming FMV, which the IRS will not allow. How to avoid: confirm the holding period is longer than one year before donating.
• Using complex vehicles like CRTs without professional advice, leading to poor structuring or unexpected tax outcomes. How to avoid: consult a tax advisor and estate attorney when setting up trusts.

FAQ

Q: Can I donate partial shares or fractional shares of an ETF or stock?

A: It depends on the recipient. Many charities and DAFs accept fractional shares when transferred through a broker or sponsor that supports fractional holdings, but some require whole-share transfers. Confirm the recipient's process before initiating a transfer.

Q: Do I need an appraisal to donate publicly traded stock?

A: For most publicly traded securities, a separate qualified appraisal is not required. However you must file Form 8283 for noncash gifts when the deduction is over $500 and follow IRS instructions when claiming larger amounts. Always keep confirmations and the charity's acknowledgment.

Q: Will donating appreciated securities reduce my taxable income immediately?

A: Yes, when you donate to a qualified public charity or a DAF you generally receive an immediate charitable deduction for the fair market value of long-term appreciated publicly traded securities, subject to AGI limits and potential carryforwards.

Q: Are donor-advised funds taxable entities and can I get the funds back if I change my mind?

A: DAFs are tax-exempt charitable vehicles and you receive an immediate deduction when you contribute. Contributions are irrevocable for personal benefit, so you cannot reclaim the assets for private use. The DAF sponsor has final grant approval, though they usually follow donor recommendations.

Bottom Line

Donating appreciated securities is a powerful, tax-efficient way to support causes you care about while often minimizing tax costs compared with selling assets first. For many investors, giving in-kind to public charities or donor-advised funds will maximize the gift and preserve capital that would otherwise be paid in capital gains taxes.

If you want income as well as charitable impact, consider a charitable remainder trust, but plan for complexity and legal fees. Regardless of the vehicle you choose, document transfers, confirm acceptance procedures, and consult a tax advisor for large or complex gifts so you know how limits like AGI caps and holding periods apply to your situation.

At the end of the day, a few careful steps can turn appreciated, concentrated holdings into meaningful charitable support while improving your tax position. If you have holdings that have appreciated substantially, now may be a good time to evaluate whether in-kind giving fits your financial and philanthropic goals.