How to Save on Capital Gains Tax While Saving the World

The stock market ended 2020 at record highs, and if you made money in the market, you’ll owe the IRS for any gains you made on the sale of appreciated stock. Whether  you have a proactive tax professional or prefer a DIY “receipts in a shoebox” approach, you’re probably familiar with the sting of paying Capital Gains Tax (CGT) on those earnings. As the 2021 tax season gets underway, we want to share this little-known giving strategy that can help you save on your capital gains tax bill while maximizing your charitable donations and making an even bigger impact on causes that matter to you.   

A Brief Capital Gains Tax Explainer

A capital gain refers to the profit realized after the sale or exchange of a capital asset above its cost and is considered part of your taxable income. To figure your exact CGT rate on stock transactions, there are a few factors to consider: filing status, total taxable earnings for 2020, the capital gain amount itself, and whether it was from a short or long-term sale. This includes  the Net Investment Income Tax or State Income Tax, for those to whom they apply. (If you’re interested in a quick estimate, NerdWallet has a great online calculator* tool.)

Let’s take a quick dive into a hypothetical investor profile.

Let’s assume that 3 years ago you bought 10 shares of a stock at $50 each for $500 and that each share is now worth $100 ($1,000 in total). If you sell the stock, you’ll pay CGT on the $500 gain. This could cost you $100 in taxes if you live in Texas or Florida or up to $200 if you live in California or New York. If you donate the after-tax proceeds of $800, you would earn a  deduction of about $300 ( assuming your tax rate is 37.5%).  After paying $200 in CGT and saving $300, you save $100 for donating $800 to the non-profit.  

Now let’s assume you donate (rather than sell) the stock. In doing so you would avoid the $200 CGT and earn a higher deduction of $375 (again assume 37.5% tax rate).  By donating  the stock, you save $575 in taxes, which is almost 6x the $100 from selling the stock and donating the after-tax proceeds.  Moreover,  the non-profit receives $1,000 instead of only $800 (25% more!).

Once you understand the math, it’s easy to see that donating stock is really, really smart. You save big on taxes and the non-profit receives a larger donation. Everybody wins!   

Put Stock in Something that Matters

While it may be late to make a difference on your 2020 taxes, it’s not too late to be mindful of what April 15, 2021 could look like for you and for causes you care about. DonateStock has made it our mission to create a fast, easy, and secure way to put stock in something that matters. Find a non-profit you’d like to support and start saving in just 10 minutes or less.

*Disclaimer: We are not tax advisors. Please consult a professional for your tax needs