As 2020 comes to an end, many of us are thinking about where to give after this tumultuous year, but how you give can be just as important to consider.

Giving with securities, such as stocks, ETF, and mutual funds can be up to 37% more tax effective than giving with cash. Stock donations is one of the fastest growing methods of giving in the United States. According to Cocatalyst Research, donors gave $21 billion worth of stocks to charities, an increase of 62% compared to the previous year1.

What Are Stock Donations to Nonprofits?

Donating stocks to nonprofits is a tax strategy that contributors can use to deduct taxes. Many people use traditional methods of donating such as cash, checks, or other financial instruments, however, donating valued stocks is ideal for maximizing the gift. Donating appreciated stock to a nonprofit is when you transfer the ownership of your shares in an asset that has gone up in value to a 501(c)3 nonprofit. By doing so, you could be giving a more appreciable gift to the nonprofit and also avoid the capital gains taxes you would have paid by selling your stocks. 

How Does the Donation of Stock Tax Savings Work?

Let's say you have $10,000 worth of stock that you bought at a price of $1,000 several years ago. At some point you will need to sell those securities, and when that happens you'll have up to 37% percent capital gains tax (state and federal) on the profit, or $3,330. So, you'll have $6,670 left. 

The nonprofit that receives the security can sell the stock without paying any taxes. That means the gift of $10,000 is kept tax free. You didn’t pay the taxes on it and neither did the nonprofit. As a donor, even if your plan was to keep the stock long term, you can use a tax strategy to donate stock to charity and buy a new set of shares on the open market with cash. Your donation of stock that was held for at least one year is still fully deductible at the $10,000 value. 

How Can I Donate To Stocks To Nonprofits?

The first step to identify your stocks which are appreciated. Next is to actually make the transfer, while securities giving normally take 30 minutes to an hour, there are now tools like Cocatalyst to easily donate shares to a nonprofit that are free for donors. 

Keep the receipt and save the donation information in your records. When tax season comes around, you can deduct donation of appreciated stock by filling out your 8283 form. 

What Are Potential Mistakes When Donating with Securities?

To properly support your nonprofit, consider these tips

  • Your assets that are held at a loss should be sold for a tax deduction. You can use capital losses from stocks to reduce your tax bill.
  • Assets held less than a year aren’t eligible for the maximize tax benefit of stock donations. When you have gifts or financial assets held one year or less, donating that stock will not have the full tax benefit.
  • Understand taxation and gifting rules. You should know the tax strategy you will use to maximize your gift and analyze your appreciated stocks before donating them.
  • Know how to evaluate the impact of your giving. Make comparisons of how it would have been if you donated cash to a nonprofit instead of donating your stocks.
  • Consider annual limits that apply to charitable deductions and valuations of your securities over time. Your total deduction of charitable contributions can’t exceed your adjusted gross income (AGI). Keep a record of all your appreciated stocks and their profit over time.
How Are Stock Donations Different from a Donor-Advised Fund (DAF)?

Stock donations through Cocatalyst are real-time gifts to any nonprofit. Donor Advised Funds and Cocatalyst are similar in vehicle structure. However, a DAF intends for donors to hold the assets in the charitable trust account for a period of time before making the actual transfer of the funds to the nonprofit.

Technologies like Cocatalyst have created new ways for donors to easily make more impact. As you plan your giving strategy for the rest of 2020 and beyond, consider how you can use your investment portfolio to drive more change.

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By Cocatalyst Research.

1. Based on 2017 and 2018 IRS Form 990 filings compiled by Cocatalyst Research.