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Why is Donating Stock to Charity Better than Cash?

There are several great reasons to donate stock. To begin with, it’s one of the most tax-savvy ways to give. Plus, today’s online platforms make it an incredibly easy and secure process.

You can donate these types of securities to nonprofits:

  • Publicly-traded stocks
  • Privately-held stocks (which will require independent appraisals beforehand)
  • Shares of mutual funds and ETFs
  • Bonds

No matter which type of appreciated stock you donate, your gift goes further than if you sold it and donated the proceeds as cash. This is because donating appreciated stock lets you save on your taxes in two ways: you avoid capital gains tax on the appreciated value, and you can also claim a tax deduction on the value of the shares you donated.

Understanding the Tax Implications of Stock Donations

Let’s take a closer look at how the tax benefits of stock donations work.

A capital gains tax is the tax you have to pay on the profit generated when you sell a share of appreciated stock. Depending on your income bracket, you could be taxed up to 20% on your capital gains (for assets you’ve held for more than a year). However, if you donate this stock to a charity instead of selling it, neither you nor the charity have to pay taxes on it.

For example, let’s say you purchased a share of stock for $100, and it rose in value to $300 over two years. You’ve generated a capital gain of $200. When you sell that share, you’d have to pay a capital gains tax of up to $40, reducing the final value that you receive from the sale. But by directly donating the stock, the money you would have paid in taxes can instead go to the nonprofit, maximizing your philanthropic impact.

And like most charitable donations, stock donations are deductible from your income taxes. When you file your federal taxes, you can deduct the donation from your taxable income if you itemize your deductions. Some states give income tax deductions for stock as well.

Giving stock to nonprofits also exempts you from the wash-sale rule, which prohibits investors from selling and then immediately repurchasing stock from a company. When you donate stock, you can immediately repurchase the same stock at its fair market value, which will reset your shares at a higher cost basis and maintain the composition of your portfolio.

Donating stock is a win-win, both for you and for the causes that matter to you.