Why donating appreciated securities often beats a cash gift

Donating long‑term appreciated securities (shares, mutual funds, or bonds you’ve held for more than one year) can produce a larger after‑tax gift than selling the assets and donating the cash. The two main tax advantages are:

  • You can generally deduct the fair market value (FMV) of the donated securities as a charitable contribution when you itemize (subject to AGI limits).
  • You avoid recognizing the capital gain on the appreciation, so you don’t pay capital gains tax that would reduce the cash available for donation.

Those two features make appreciated‑security gifts particularly attractive when the asset has large unrealized gains.

(For the IRS rules on deductions and substantiation, see IRS Publication 526 and the IRS charitable deductions overview: https://www.irs.gov/charities‑non‑profits/charitable‑organizations/charitable‑deductions.)

How the mechanics and tax math work (simple example)

Example: You bought stock for $30,000; it’s now worth $100,000 (long‑term). Two options:

1) Sell the stock, pay capital gains tax, donate cash.

  • Gain = $70,000. If your combined federal capital gains/NIIT rate is roughly 20% (illustrative), tax on the gain ≈ $14,000. Cash left to donate ≈ $86,000.
  • Charitable deduction (cash) = $86,000 (if you itemize). Net effect: charity receives $86,000; you’ve borne ~$14,000 tax cost.

2) Donate the stock directly to a public charity.

  • You receive a charitable deduction for the FMV = $100,000 (subject to limits).
  • No capital gains tax is recognized by you on that $70,000 appreciation.
  • Charity typically sells the shares and receives $100,000.

This example shows why direct donation lets the charity get more and gives you a larger deduction. In my practice I’ve used this with clients to convert a highly appreciated holding into a larger charitable gift while lowering their tax drag.

Key IRS limits and rules to remember

  • Holding period: To claim the FMV deduction you must have held the donated security for more than one year (long‑term). If held one year or less, your deduction is generally limited to your cost basis, not FMV (IRS Pub. 526).
  • AGI limits: For gifts of long‑term appreciated property to public charities, the deduction is generally limited to 30% of your adjusted gross income (AGI). Excess may be carried forward for up to five years subject to the same limits. Cash gifts to public charities are generally limited to 60% of AGI (see IRS Pub. 526 for current details).
  • Substantiation and forms: Noncash gifts over $500 must be reported on Form 8283. For donated property valued over $5,000 (other than publicly traded securities), a qualified appraisal and Section B of Form 8283 are usually required. Publicly traded securities transferred via broker records generally avoid the appraisal requirement but still require proper documentation (Form 8283 Section A) and a contemporaneous acknowledgment from the charity.

Reference: IRS Publication 526 and Form 8283 instructions (https://www.irs.gov/forms‑instructions). Always check the latest IRS guidance before filing.

When this strategy is most advantageous

  • You have a highly appreciated, long‑term holding you no longer want to sell.
  • You will itemize deductions in the year of the gift (or you can manage deductions across years using a donor‑advised fund or bunching strategy).
  • You want the charity to receive the maximum value of the asset.
  • You are subject to a capital gains tax that would otherwise reduce cash available to donate.

If you normally take the standard deduction and can’t or won’t itemize, donating appreciated securities directly to a charity still benefits the charity but may not produce a tax deduction advantage for you in that year—unless you use a donor‑advised fund or bunch gifts to create an itemizable year (see the related article on tax‑efficient strategies). For planning ideas, see our article on tax‑efficient charitable giving strategies: Tax‑Efficient Charitable Giving Strategies.

Practical steps to donate appreciated securities

  1. Confirm the charity accepts noncash gifts (most public charities and donor‑advised funds do).
  2. Tell the charity and your broker the intent to transfer securities. Provide the charity’s brokerage account info (DTC number) if required.
  3. Transfer the shares in‑kind from your brokerage account to the charity’s brokerage account. A direct transfer preserves the tax characterization.
  4. Obtain a written acknowledgement from the charity that includes the number of shares, date of transfer, and a statement whether the charity provided goods or services (required for your tax records).
  5. Complete Form 8283 when filing your return if the aggregate noncash contributions are more than $500; if any single item (other than publicly traded securities) is more than $5,000, follow the appraisal rules.

This transfer method avoids having the donor recognize a sale and capital gain.

Common mistakes and traps to avoid

  • Selling first then donating cash without checking the tax math: selling can trigger capital gains that reduce the net gift amount.
  • Donating short‑term holdings expecting an FMV deduction: you must hold assets >1 year to claim FMV.
  • Failing to get proper acknowledgment or missing Form 8283: that can jeopardize or reduce your deduction.
  • Donating to organizations that aren’t qualified public charities: confirm the organization’s tax‑exempt status (IRS Tax Exempt Organization Search).

For a practical checklist on receipts, limits, and recordkeeping, review our companion guide: Charitable Giving: Receipts, Limits, and Recordkeeping.

Special situations and planning ideas

  • Donor‑Advised Funds (DAFs): Contributing appreciated securities to a DAF gives an immediate tax deduction while allowing you to recommend grants over time. This can be helpful if you want to bunch multiple years’ giving into one tax year.
  • Gifts of mutual funds: Donating shares of a mutual fund is often efficient because mutual funds distribute cost basis information and the charity can sell without generating a taxable event for you.
  • Private company stock or restricted stock: These gifts are more complex and often require a qualified appraisal and legal review. Work with your tax advisor and the charity beforehand.
  • Itemizer vs Standard Deduction: If you normally take the standard deduction, consider bunching gifts or funding a DAF in a high‑income year to convert a nonitemized donor into an itemizer for that year.

Real client illustration (anonymized)

A client bought tech shares years ago for $30,000; their value rose to $100,000. They planned a $100,000 gift to their university. We donated the shares directly to the university foundation. The charity received the full $100,000; the client avoided recognizing the $70,000 gain and received a charitable deduction for $100,000 (subject to AGI limits). If they had sold first and donated cash, they would have paid capital gains tax that reduced the gift and their deduction. In practice, this approach increased impact and reduced tax friction.

Bottom line (and best next steps)

Donating appreciated long‑term securities is a tax‑efficient way to increase the size of your charitable gift while avoiding capital gains tax. The strategy works best when you:

  • Hold the security more than one year,
  • Are able to itemize or use a donor‑advised fund/bunching strategy,
  • Follow IRS reporting and appraisal rules.

Before you act, consult a qualified CPA or tax advisor to confirm limits, timing, and reporting—this article is educational and not a substitute for personalized tax or legal advice.

Sources and further reading

Disclaimer: This content is for educational purposes only and does not constitute individual tax, legal, or investment advice. Consult your CPA or tax attorney for advice tailored to your situation.