Making a large donation to your favorite charity? You don’t necessarily have to give a cash gift.Instead, you might donate shares of stock in your portfolio. But there’s a “wrong way” and a “right way” to do it.
Strategy: All other things being equal, give away stock with a low tax basis. On the other hand, hold onto stock with a high basis.
Generally, you can deduct the full fair market value of the stock you contribute to charity. So you never have to pay tax on the stock’s appreciation.
Here’s the whole story: If you donate stock that would have produced a long-term gain had you sold it (i.e., stock held more than one year), the tax law says you can deduct the stock’s fair market value when you make the contribution. But if a stock sale would have produced ordinary income (i.e., stock held one year or less), the IRS limits your deduction to your basis in the stock. If the stock declines in value, the IRS will limit your deduction to its fair market value.
So if you donate low-basis stock that you’ve held more than a year, you realize a sizable tax benefit from the appreciation. On the other hand, you should keep low-basis stock you’ve held for less than a year or high-basis stock that is now worth less than you paid for it.
You may have other valid reasons for keeping certain stock shares and donating others. For instance, you may want to hold onto a stock that has declined in value if you expect it to rebound. Just remember to factor taxes into the equation.