Let’s take a look at some of the laws, benefits, and potential complications of making a gift of a financial asset.
Benefits of Donating Stocks and Other Financial Gifts
The obvious benefit of donating stocks and other financial gifts to charity is that you can support a cause that’s important to you. In addition, there are some key financial benefits to be aware of, too.
Tax Deductions
First, taxpayers who itemize their deductions can take a tax deduction for donations to qualified organizations if they meet certain record-keeping criteria. When you give a non-cash gift, you may be able to deduct the fair market value of the gift. While you need to maintain records for all non-cash gifts, for those where the deduction is greater than $500, the donor must file Form 8283, Noncash Charitable Contributions, along with their tax return. For any gifts where the deduction exceeds $5,000, you would require a qualified appraisal.
Saving on Capital Gains Tax
Another benefit to donating financial assets is that you can avoid capital gains tax and use that to increase your gift. When you sell an appreciated asset, the IRS generally requires that you pay capital gains taxes on the profit. If you sold an asset and donated the proceeds to charity, a part of that money would have to be used to cover your tax liability. But when you donate the appreciated asset to charity, you can avoid those capital gains taxes and donate the full amount to charity. For example, if you bought 1,000 shares of XYZ stock for $10 per share, your cost-basis, or the value used to determine capital gains tax, would be $10,000 (1,000 x $10). If the stock now trades at $20 per share, the value of those shares is $20,000. If you sold those shares, assuming a 15% long-term capital gains tax rate, you’d need to pay $1,500 in capital gains tax on the $10,000 gain you made on the sale. Assuming no state taxes and no medicare surtax, this is what the math would look like if you donated those shares instead:
Increase in Value
Historically, long-term investments in stocks and other financial assets have reaped generous returns. Donating financial assets that the charity doesn’t sell right away and holds on to for a long time could increase the value of that gift manifold.
Donating Stocks
If you own shares in a company, you can gift those shares to a charity of your choice. The process for doing so depends largely on the type of stock you wish to gift. When it comes to gifting shares in a publicly traded company, the process is quite simple. You can send the shares directly to the account of the charity you’re planning to donate to. To accomplish this, you’ll have to obtain information from the charity about the account the shares will be transferred into. Some charities list this information directly on their website for prospective donors. For stocks other than those that are publicly traded, the process might be a bit more difficult. In the case of restricted stock, for example, there are certain restrictions around their sale, and you may need to gain permission from the company’s general counsel to donate the stock.
Donating Bonds
A bond is a debt security that can result in profit through the interest payments the issuing entity makes to the bondholder, as well as the potential appreciation of the bond if you sell it for more than you bought it before it reaches maturity. And luckily, the process of donating or gifting bonds to charity is quite similar to the process of donating stock. You simply need to own the bond and have the account information for where to transfer it. In the case of savings bonds, there are a few workarounds that allow you to support the charity of your choice with this type of asset. First, you can redeem the savings bond and use the proceeds to make a donation to charity. (Keep in mind that this eliminates some of the tax benefits that can come with donating financial assets to charity.) Another option is to purchase a savings bond as a gift for the charity rather than in your own name. Finally, you can leave your savings bond to the charity of your choice through your will or charitable-remainder trust.
Donating Cryptocurrency
While some people consider cryptocurrency simply another form of currency, just like the U.S. dollar, the IRS doesn’t see it that way. Rather than seeing cryptocurrency as legal tender, the IRS considers cryptocurrency to be a digital asset, similar to a stock or bond. It could also be considered a form of compensation if you received it as a reward for mining or something else. The process of gifting cryptocurrency to a charity is a bit different from stocks and bonds simply because these digital assets aren’t generally in the same brokerage accounts where we keep other investments, and it requires the charity to have a way to accept the cryptocurrency. Cryptocurrency is also generally a more volatile asset class than stocks and should be treated with extra vigilance when trying to optimize taxes while maximizing the gift to the cause of your choice. With taxation laws on crypto short-term trading versus long-term investing, careful analysis to calculate the tax impact of each approach to donating versus selling or holding is warranted. Luckily, many charities have taken note of the rise in the popularity of cryptocurrency and have made arrangements to accept them as donations. To find out if you can donate cryptocurrency to your favorite charity, simply visit its website or contact it directly.
Donating Non-Fungible Tokens (NFTs)
A non-fungible token (NFT) is essentially a digital representation of an asset that has a single, verifiable owner. Things like art, music, and tweets can be turned into NFTs. There have been plenty of examples of people donating the proceeds of an NFT to charity. That was the case with an NFT that former Twitter CEO Jack Dorsey sold of his first tweet and a series of NFTs created by Kansas City Chiefs quarterback Patrick Mahomes. Depending on the asset, you may also find a charity willing to accept an NFT to auction it off itself. While NFT gifts in excess of annual gift tax exclusions are subject to gift tax, there’s little IRS guidance on tax consequences of charitable donations, and charities may be hesitant to accept them for that reason, among others.
Donating Credit Card Points
You might be surprised to learn that if you have unused credit card points, you can also donate those to charity. And not only is it possible, but credit card companies and loyalty programs encourage it by making it as easy as possible for you. When you log into your account with American Express, Discover, and other programs, you’ll be given the option of donating your points to one of their connected charities. Other nonprofit organizations specifically seek out frequent flyer miles or credit card travel points. For example, the organization Miles4Migrants uses donated points to help refugees and asylum-seekers fly to be reunited with loved ones.
Limitations of Donating Financial Assets
You should be aware of the risks involved with gifting a financial asset. First, some charities may prefer not to receive non-cash assets or may not accept them at all. If they find cash donations more convenient, then that may be the only option. After all, by gifting stock or another asset, you create another step for the charity where they likely have to sell it to use the proceeds for the benefit of the organization. Another potential downside is that because of the volatility of the market, the value of an asset when you gift it may not necessarily be its value when the charity sells it. For example, suppose you gifted a stock, and then the market experienced a correction. A stock that you donated at $100 may suddenly be worth only $75. While this doesn’t financially disadvantage you, it means the charity isn’t receiving as much as you intended.
The Bottom Line
Donating stock and other financial gifts can benefit you in both emotional and financial ways. It allows you to support a good cause while reducing your tax burden. But before you donate one of these assets to your favorite charity, double-check that the charity actually accepts this type of donation and that you fully understand how it works.
