How to Avoid Capital Gains Tax on Stocks

How to Avoid Capital Gains Tax on Stocks

Among the best kept secrets in personal finance is that when you donate stock to charity, you can avoid capital gains tax (while maximizing your charitable deduction) on gifted stock held for more than one year. Here’s the why and the how to (legally) avoid taxes by making smarter pre-tax gifts to your favorite charity, school or community organization. Note: we are not financial advisors and this is not to be taken as financial advice. Please consult with a tax professional to learn more about how to avoid capital gains tax by donating appreciated stock.

What we’ll cover about how to avoid capital gains tax on stocks:

• The Case for Pre-Tax Gifts
• The Case for Stock
• Short-term vs. Long-Term Tax Implications
• Making Tax-Advantaged Stock Gifting Easy

The Case for Pre-Tax Gifts

While most donors are aware that charitable gifts are tax-deductible, few think about how to further reduce taxes by making pre-tax donations. This is changing for many reasons.

First, the needs of charities and nonprofit organizations are greater than ever - that’s why many are expanding their scope of fundraising activities. At the top of their wish list are pre-tax gifts such as stock and crypto which are liquid (unlike real estate or art) and tend to be larger than after-tax gifts via cash, checks and credit cards. When donors make pre-tax donations of appreciated assets, the nonprofit keeps the proceeds that would otherwise have gone to pay the tax on the capital gain. Savvy nonprofits understand this and are increasingly asking donors to make larger pre-tax gifts.

Second, the benefits of donating appreciated assets (held more than one year) are becoming much more widely known. As we’ll discuss in detail below, the tax benefits of donating appreciated assets are unparalleled as donors can avoid the capital gains tax while deducting the market value of the gift. Taxpayers benefit from a double-dose of savings when they donate appreciated, non-cash assets.

The Case for Stock

Among non-cash asset classes, Stock is the most widely held with almost 60% of US households owning individual stocks, mutual funds and ETFs. Investments in stocks (including funds) also represents the largest pool of personal capital as the average investment account is 8-10x higher than the value of household checking accounts). Put simply, more people own more stock than any other asset class.

When stock is sold for a profit, a capital gains tax applies, based on the taxpayer’s adjusted gross income. Beyond the federal capital gains tax rates of 15% (if adjusted gross income or “AGI” of $42,000 to $460,000) and 20% (if AGI is above $460,000) there is also the 3.8% net investment income (or “NII”) tax. There are also state taxes to pay: today 41 states tax capital gains at rates that may reach 13%. The bottom line is that capital gains tax can add quickly to as much as 36% for high earners in states like California.

The good news is that there are legal ways to avoid and reduce taxes while making the world a better place. Charitable stock gifting is the most tax-advantaged way for donors to support nonprofits for two reasons:

First, when investors donate stock held for more than 1 year, they may avoid the capital gains tax on the appreciated stock. This can add up to significant savings.

Second, donors may also itemize the charitable deduction based on the current market value of the donated stock, provided it was held for more than one year.

This results in a double-win for investors: not only can they avoid the capital gains tax when harvesting gains on appreciated stock while also reducing taxable income by deducting the stock gift. For these reasons, stock gifting represents the most lucrative form of charitable giving across the most U.S. households.

Short-term vs. Long-Term Tax Implications

It’s important to note that the tax advantages are only available when donating long-term holdings, which are defined as more than 12 months. This is critical for two key reasons.

First, short-term (less than one year) gains are taxed at personal income tax rates, which may be as high as 48% for state and federal tax in some states. It’s also important to note that short-term gains are not shielded from being taxed. If you donate stock you’ve held less than one year you will pay ordinary income tax rates on 100% of the gain.

Second, deductions are also limited for short-term gains. Rather than deduct the market value of the gifted stock, deductions for short term holdings are limited to the amount you paid for the stock. The bottom line: do not donate stock held less than one year.

Making Tax-Advantaged Stock Gifting Easy

For decades, charitable stock gifting was a time-consuming, painstaking process. When I made my first stock gift, it took hours of researching the process, contacting the charity, contacting my broker, filling out forms, delivering instructions and following up to make sure the gift went through. While I was able to avoid the capital gains tax, it was simply too much hassle and I never did it again.

Years later, I was contemplating that painful experience and how it should be so much easier. When I realized no one had solved the stock gifting problem, I decided that this would be my mission which led to the founding of DonateStock, Inc. As they say, the rest is history.

Stock gifting is now fast, safe and free for investors with portfolios of all sizes. No longer is stock gifting reserved for the uber-wealthy - today anyone can avoid capital gains tax by donating appreciated stock in minutes to more than 1 million nonprofits at DonateStock.com.

Recap: Keys to Avoiding Capital Gains Tax on Stock

Donating stock to charity enables you to avoid capital gains tax while maximizing your charitable tax deduction on gifted stock held for more than one year. Here are the key steps to remember:

1. Focus on pre-tax gifts vs. after-tax donations
2. Donate stock to harvest gains while avoiding capital gains tax
3. Select long-term holdings to qualify for tax-advantaged treatment of your charitable stock gift

As noted above, stock gifting is the most tax-efficient way to support the causes you care about and now it’s accessible and easy for everyone. Again, we are not financial advisors and this is not to be taken as financial advice. Please consult with a tax professional to learn more about how to avoid capital gains tax by donating appreciated stock. Then visit Donatestock.com to start making tax-advantaged stock gifts today.

Written by Steve Latham, CEO and co-founder of DonateStock, Inc.