Primer on Gifts of Appreciated Securities

What Are Appreciated Securities?

Appreciated securities are stocks, bonds or mutual funds that have increased in value since their purchase. In the last few years, Americans’ household wealth has continued to grow, reaching record highs driven primarily by increases in the value of corporate stock. According to Federal Reserve reports, the majority of American families have stock holdings, directly or indirectly, in individual stock shares or other arrangements like IRAs, 401(k)s and 403(b)s.

Donors are likely to own some of these valuable assets, so it’s important for nonprofits to demonstrate the tax advantages of using them to make charitable gifts.

Benefits of Giving Stocks

Instead of selling stocks and using the proceeds to make charitable gifts, donors can transfer the stock directly to charity.

Tax deduction: If the assets have been held for more than a year, donors are eligible to take a charitable income tax deduction equal to the fair market value of the asset, not just what they paid for it—up to 30% of their adjusted gross income if they itemize.

Example: Using a stock purchased for $5,000 years ago that is now worth $10,000 can result in a $10,000 deduction and a $10,000 gift!

Capital gains savings: Your donor avoids the capital gains tax that would be owed if they sold the securities themselves.

Portfolio rebalancing: A way to reduce concentrated holdings without triggering tax liability.

Simple: Transfers are straightforward, and your organization receives the full fair market value of the gift.

Some donors who own securities that have performed particularly well over the years may be reluctant to sell or give the stock because they want to hold that investment as part of their portfolio. Fortunately, there is a charitable gift planning strategy that allows them to make a gift of that security and, in effect, maintain their ownership position.

For example, suppose an individual has been considering a cash gift of $25,000 to your organization. Instead of giving cash, she decides to give stock currently worth $25,000 for which she originally paid $5,000 several years ago. She may then use the $25,000 cash she did not donate to repurchase shares in the same company.

In this way, she can make a charitable gift of $25,000 with stock that originally cost just $5,000. She does not owe capital gains tax on the $20,000 of appreciation and can deduct the full $25,000 if she itemizes. By repurchasing the stock, she still owns shares but with a new, higher cost basis of $25,000. If the value of the stock increases in the future, she will have less reportable capital gain if it is ever sold. If the stock declines in value, she may be able to claim a capital loss.

While no one can accurately predict how the stock market will perform, there are really only three possibilities: stocks may grow in value, maintain the same value or decline in value. Those who carefully consider how and what to give may be able to achieve multiple goals and enjoy unexpected benefits as a result.

The Nonprofit’s Role

According to IRS studies, gifts of publicly traded securities are the primary source of noncash charitable gifts each year and regularly yield more gift income than total realized bequests.

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