Giving smarter: Donating appreciated securities

One of the most effective ways for investors to give in-kind is by donating appreciated public securities. This involves transferring ownership of publicly traded stocks, bonds, or mutual funds that have increased in value since purchase to a charitable organization. There are many benefits to this approach, including:

• Improved tax efficiency. Donors can deduct the fair market value of their securities as of the date of donation, which can be significantly higher than the original purchase price.

• Avoidance of capital gains tax. By donating the securities directly to the charity, rather than selling the securities and then making a cash donation with the proceeds, donors avoid paying capital gains tax on the appreciation.

• Increased gift amount. Often, donors can make a larger gift by using this method than they could if they were donating cash. 

Donating appreciated securities is a straightforward process. Investors can work with their financial advisor or directly with the charity to initiate the transfer. It's important to confirm both that the charity is equipped to accept securities and that the assets being donated aren’t subject to any restrictions or holding periods.

For the donor to be able to deduct the value of the gift from federal income tax, the charity must be a qualified organization under the Internal Revenue Code. Investors can use the IRS’s online tool, Tax Exempt Organization Search, to verify the charity’s status.

“When it comes to charitable giving, the benefits of donating appreciated securities are clear,” said Garrett Harbron, J.D., CFA, CFP^®, Vanguard head of advised wealth management strategies and one of the authors of the research paper Charitable Gifting Basics: Getting the Most From Your Giving. “Not only do donors receive a tax deduction for the full fair market value of the securities, but they also avoid capital gains tax on the appreciation. This makes it a win-win for both the donor and the charity."

Bob and Jill are married and file a joint tax return. Together, they have an adjusted gross income (AGI) of $150,000. They decide to donate $10,000 to one of their favorite local charities and to fund their donation with 50 shares of a tech stock that they own, which is currently worth $200 per share. The stock was purchased several years ago for $100 per share. 

By gifting the appreciated shares in-kind rather than selling them and donating the proceeds, Bob and Jill realize an added tax benefit of $750. The accompanying table compares the tax impact of the two methods of donation. 

Hypothetical case study: Bob and Jill

Donating appreciated securities is a strategic way for investors to support their favorite causes while potentially reducing their tax liability. By transferring ownership of these assets directly to a qualified charity, donors can maximize the value of their gift and avoid capital gains taxes.

“Now is a great time for investors to review their charitable giving strategies to see if donating appreciated securities makes sense for them,” Harbron said. “For many investors, it can be a tax-smart way to make a meaningful impact.”