Why closely held stock gifts matter

Donating closely held (private) stock can be one of the most tax‑efficient ways to give. Unlike publicly traded securities, private shares often carry large unrealized gains but lack immediate market liquidity. If properly structured, a donor who has held the shares for more than one year may claim a charitable deduction for the fair market value (FMV) of the shares and avoid paying capital gains tax that would arise on a sale. That said, the lack of a public market makes valuation, transfer mechanics, and legal constraints the central issues to resolve before you give.

In my practice advising business owners and family shareholders, the most successful gifts follow a checklist: confirm the donee can accept the stock, obtain a qualified appraisal, complete IRS substantiation (Form 8283), and coordinate transfer mechanics with counsel and the charity. Below I explain the key tax rules, practical structures, and common pitfalls.

Key tax and substantiation rules to know

  • Long‑term holding requirement: For a deduction based on FMV, the donor generally must have owned the stock for more than one year (long‑term capital gain property). (See IRS Publication 526 on charitable contributions.) IRS Publication 526

  • Deduction limits by recipient type: Gifts of appreciated long‑term property to public charities are generally deductible up to 30% of your adjusted gross income (AGI). Different limits apply for cash gifts and for gifts to private foundations; donations to private foundations may be treated less favorably — often limiting a deduction to your cost basis rather than FMV for certain property types. Consult IRS Publication 526 for current AGI limits. IRS Publication 526

  • Appraisal and Form 8283: Closely held stock normally requires a qualified appraisal when the claimed deduction exceeds $5,000, and you must attach a completed Form 8283 to your tax return for noncash gifts. The appraisal must meet IRS requirements described in Publication 561 and Form 8283 instructions. IRS Publication 561 — Valuations | Form 8283 info

  • S‑corporation and entity restrictions: Not all private company stock can be donated directly. S corporation rules and corporate governance documents can limit transferability; donating S‑corp shares to many charities may be impermissible or could terminate S status. Confirm shareholder agreements and tax eligibility before transferring. IRS — S Corporations

Practical structures and when to use them

  1. Direct gift to a public charity
  • Best when the charity can accept and immediately sell the shares.
  • Donor gets an FMV deduction (if long‑term), and the charity (if tax‑exempt) generally pays no tax on the sale.
  • Requires a qualified appraisal and Form 8283 for significant gifts.
  1. Gift into a donor‑advised fund (DAF)
  • If the charity cannot accept private stock or needs time to sell, a donor‑advised fund or community foundation is a practical intermediary.
  • DAFs commonly accept closely held stock, sell it (subject to valuation review), and grant proceeds to operating charities over time. See our primer on donor‑advised funds for flexible giving options. Donor‑Advised Funds: Flexible Philanthropy Explained
  1. Charitable remainder trust (CRT) or charitable lead trust (CLT)
  • Use a CRT to monetize an illiquid position while keeping an income stream for the donor or heirs and receiving an immediate income‑tax charitable deduction. CRTs and CLTs are more complex and require careful handling of self‑dealing rules and unrelated business taxable income (if applicable).
  1. Partial gifts / fractional transfers
  • You can donate a minority interest to start philanthropic support while retaining control; however, valuation discounts for lack of marketability or minority status will affect the deduction and may draw IRS scrutiny.
  1. Contributions to private foundations or donor‑controlled vehicles
  • Private foundations can hold private stock but are subject to self‑dealing and excess business holding rules. Selling or distributing closely held stock from a foundation involves additional rules and potential excise taxes.

For step‑by‑step guidance and an assessment of transfer risks, see our detailed walk‑through: Charitable Giving of Closely Held Stock: Steps and Risks.

Valuation and FMV issues — what to prepare

  • Qualified appraisal: Engage a qualified, independent appraiser who understands private company valuations. The IRS examines large deductions for private stock closely; use an appraiser with relevant credentials and a defensible valuation report (discounts, comps, income approach, etc.). (See IRS Publication 561.)

  • Discounts: Minority interest discounts and discounts for lack of marketability are common. Those discounts reduce FMV and therefore the charitable deduction — but they must be supported by the appraisal.

  • Supporting documents: Shareholder agreements, buy‑sell agreements, capitalization tables, financial statements, and transfer restrictions: provide these to the appraiser and the receiving charity.

Transfer mechanics and legal checks

  • Transfer restrictions: Review corporate bylaws, shareholder agreements, and any right‑of‑first‑refusal (ROFR) clauses. Those limits can prevent transfer or require board approval.

  • Stock certificates and stock powers: Many private transfers require properly endorsed stock certificates or a stock power executed and delivered to the charity or intermediary.

  • Company consent: Some closely held companies require board or shareholder approval for transfers. Get written corporate consent or a transfer resolution before completing the gift.

  • Notify capital providers: If your company has convertible notes or preferred stock with anti‑dilution or consent rights, coordinate with counsel to avoid triggering covenants.

Entity‑specific pitfalls and gotchas

  • S corporation shares: Many charities cannot be S‑corp shareholders. Donating S‑corp stock can cause corporate tax status changes or be blocked by the company. Get tax counsel and corporate approvals.

  • Private foundation rules: Self‑dealing and excess business holdings can create excise taxes if the foundation engages in prohibited transactions with insiders. Keep foundation counsel involved.

  • Charities that can’t accept private stock: Smaller charities sometimes lack the accounting or legal capacity to accept illiquid assets. Use a DAF or intermediary if the charity declines the gift.

Common mistakes and how to avoid them

  • Skipping an appraisal: Don’t. For gifts over $5,000 the IRS expects a qualified appraisal.

  • Assuming market value equals internal accounting value: The FMV for donated private shares is an independent valuation, not book value.

  • Ignoring transfer restrictions: A pledged gift that can’t be transferred is effectively worthless to the donee.

  • Not coordinating timing with income planning: Deductions have AGI limits and carryover rules; year of deduction matters.

Example (illustrative, not advice)

A donor bought private shares for $100,000 years ago; FMV per a qualified appraisal is $600,000. Donating the shares directly to a public charity (and meeting the long‑term holding requirement) may allow a $600,000 deduction (subject to AGI limits) and avoid capital gains tax the donor would pay on a $500,000 gain. The charity typically sells the shares tax‑free and uses proceeds for its mission.

Practical checklist before you give

  • Confirm the donee charity can accept private stock and has policies for handling it (or select a DAF).
  • Review company documents for transfer restrictions and get required approvals.
  • Order a qualified independent appraisal early in the process (if deduction likely exceeds $5,000).
  • Complete and retain Form 8283 and the appraisal report when filing your tax return.
  • Coordinate with tax counsel about AGI limits, private foundation rules, and S‑corp issues.

Final points and professional recommendation

Donating closely held stock can deliver powerful philanthropic and tax outcomes, but only when structured deliberately. In my experience working with closely held business owners, the most common reason gifts fail is avoidable: lack of early coordination among the donor, legal counsel, the company, and the receiving charity. Begin planning months before you intend to transfer shares.

This article is educational and not individualized tax advice. Consult your tax advisor, qualified appraiser, and corporate counsel before completing any gift. For IRS guidance on substantiation and valuation, see Publication 561 and Publication 526 and consult the Form 8283 instructions. IRS Publication 561 | IRS Publication 526 | Form 8283 guidance

Further reading on related topics and strategies is available on FinHelp: our overview on broader charitable strategies for donating closely‑held stock and the donor‑advised fund guide linked above.