Tax Deductions on Stocks Donated to Charity

by Michael Marz
Stock tables can help you determine your stocks' fair market value.

Stock tables can help you determine your stocks' fair market value.

Jupiterimages/Photos.com/Getty Images

Many tax-exempt charities will gladly accept your noncash donations, such as stocks and other investments, as long as the property has value. If you go this route, you're still eligible to take a charitable contribution deduction for donating a stock portfolio. The rules governing how much of a deduction you can take for the donation, however, may require a little more time to sort out than your cash donations do when it comes time to do your taxes.

Valuing Stock Donations

There are two steps involved to calculate your charitable deduction for a stock donation. First, you must determine the stocks' fair market value, which is the price a buyer is willing to pay for the stocks in the open market. Once fair market value is established, you then need to figure out whether a capital gain would result if you sold the stock on the date you make the donation. For publicly traded stocks, fair market value is equal to the average of the highest and lowest price the stock trades for on the date it's donated. However, if you make the donation on a day when the markets are closed, the IRS requires that you use a weighted average of the average stock prices of the two closest trading days before and after the date you make the donation.

Gain Or Loss

For income tax purposes, you calculate the gain or loss that would result from a hypothetical sale by subtracting your basis in the stocks from their fair market values. Basis is essentially all of your acquisition costs, which in addition to the original purchase price, includes commissions and fees you paid to complete the purchase. If, however, you received the stocks as a gift or from an inheritance, your basis is the same as it was to the donor or decedent. When a hypothetical sale of the stocks doesn't result in a capital gain, meaning fair market value is equal to or less than your basis, you simply use the stock's fair market value as the amount of your charitable contribution deduction.

Capital Gain Property

The tax rules governing the charitable contribution deduction treat your stock donation as a donation of “capital gain property” that is subject to limitations only when the gain is a long-term one. In other words, if you owned the stock for more than one year, your donation is subject to the capital gain property restrictions. If it's a short-term gain, you would have been taxed at ordinary income tax rates and as a result, the maximum deduction you can take is always limited to your basis in the stocks.

Limits on Donations

Charities that are eligible to accept tax-deductible donations are generally considered "50 percent limit" organizations under the tax code. The significance of this designation is that your total charitable deduction cannot be more than half of your adjusted gross income. However, when your stock donation is considered capital gain property and you use fair market value to arrive at your deduction, the annual limitation on your charitable deduction is reduced to 30 percent. To preserve the 50 percent limit, you must use your basis in the stocks instead of fair market value.

About the Author

Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.

Photo Credits

  • Jupiterimages/Photos.com/Getty Images