Which Stocks to Donate?
Which Stocks to Donate?
By Steve Latham
Co-Founder and CEO of DonateStock
Charitable stock gifting is the most tax-advantaged way to support nonprofits. However, selecting the best stock to donate may not always be so simple. Here are some tips for making the best choice.
Now that you’ve learned about the benefits of donating stock it’s time to think about which stocks to donate. For some this may be an easy question – for others it may be more complex.
As a reminder, the tax benefits of stock gifting (avoid capital gains tax and deduct the fair market value) apply to stock held more than one year. For stocks held less than one year, the capital gain tax still applies and you can only deduct the cost basis. So let’s start with your long-term holdings.
Among these holdings, here are 3 guidelines for choosing which stock (and Lot) to donate:
- Harvest gains on hot stocks
- Share the gains on your all-time winners
- Reduce portfolio concentration
Hot stocks are those that have appreciated dramatically in the last 12 months. And as we now know, what goes up quickly can come down even faster. Consider Moderna (MRNA) which was one of the top performers in mid-2021, increasing from $30 in March 2020 to almost $450 in September 2021. With 15x gains, the fall of 2021 was the time to donate MRNA. By the end of 2022 it had fallen 70% to $135. If you own a hot stock, harvest gains and avoid taxes by donating it sooner than later.
All-time winners are stocks that have appreciated dramatically over the long-term. Apple (AAPL) is one of the most widely held stocks – and one of the best long-term performers. In early 2017, AAPL was trading at $35 per share, implying a 370% gain ($165) at the time of this article. If you own AAPL, it’s a great stock to give to charity.
Portfolio concentration: Diversification of risk is one of the golden rules of investing. If you’ve had supersized gains in one or two stocks, you may now have too much concentration in those positions. So what do you do when one of your stocks becomes too big for your portfolio? You could sell some and incur the taxes, or you could donate some shares to your favorite cause. The receiving organization will be more than happy to help you remove some concentration risk from your portfolio.
Selecting the right Lot.
Once you’ve determined which stock to donate, you may select which lot of shares to donate. Think of a Lot as the batch you purchased on a specific date and at a specific price. As many investors use dollar-cost-averaging to purchase shares of the same stock over time, it’s important you select the right Lot.
The rule to selecting the right Lot is simple: donate shares from the Lot with the lowest cost basis and highest gains. This is illustrated below.
This approach results in the maximum tax advantages today (avoiding the capital gains tax on the gifted shares) and in the future: when you donate shares with the lowest cost basis it increases the average cost basis of remaining shares, which reduces your future gains and tax liability.
In most cases FIFO (first in, first out) works quite well. But if you took advantage of a dip to purchase more shares of a stock you already held, you should select the Lot with the lowest price (in this case, not FIFO).
In summary, charitable stock gifting is a win-win for investors and the nonprofits they support. As noted above, selecting the right stock to donate is not hard when you know what to look for.
Now that stock gifting is fast, safe and free, it’s easy and convenient to harvest gains, reduce your taxes and make the world a better place. To learn more about how we’re seeking to transform charitable giving, please visit https://donatestock.com/about
*Disclaimer: We do not provide investment or tax advice. This is informational only. Please speak to a tax professional.