Should you donate stock or sell it first to time capital gains?

Deciding whether to donate appreciated stock directly or sell it first and donate the cash is one of the highest‑leverage choices a donor with securities can make. Direct gifts of long‑term appreciated publicly traded stock typically let you avoid capital gains tax and — if you itemize — claim a charitable deduction for the stock’s fair market value (FMV). Selling first converts the gain into taxable income, which reduces the after‑tax amount available to donate.

This article explains the tax rules, practical steps, documentation requirements, calculations you should run, common pitfalls, and planning options (including donor‑advised funds and bunching) so you can decide with confidence. Citations: IRS Publication 526 (Charitable Contributions) and IRS Form 8283 instructions; see IRS guidance on donating appreciated securities for details (links below).

Why the timing matters (tax mechanics)

  • Donating long‑term appreciated securities (held > 1 year) directly to a public charity: you generally can deduct the FMV of the gift up to 30% of your adjusted gross income (AGI). You avoid recognizing the capital gain and therefore avoid paying federal capital gains tax on the appreciation. Excess contributions can usually be carried forward up to five years (IRS Pub. 526).

  • Selling first: you realize the gain and must pay capital gains tax (long‑term rates are 0%, 15%, or 20% depending on taxable income, plus the 3.8% Net Investment Income Tax (NIIT) when applicable). After paying taxes, you donate the remaining cash and deduct that cash amount (subject to the higher 60% of AGI limit for cash gifts to public charities). Because selling generates a tax bill, the after‑tax donation is normally smaller than the FMV you could donate directly.

  • Short‑term holdings (≤ 1 year): if the stock is short‑term, donating it usually gives you a deduction limited to your cost basis rather than FMV. In that case selling first (recognizing short‑term gain taxed at ordinary rates) could produce the same or better tax result depending on circumstances.

Authoritative references: IRS Publication 526 and the Form 8283 instructions explain limits and reporting requirements for noncash gifts (IRS: https://www.irs.gov/publications/p526).

Quick numerical comparison (illustrative)

Scenario: stock bought for $10,000, FMV now $25,000, long‑term gain = $15,000.

  • Donate stock directly:

  • Charity receives $25,000.

  • Donor claims $25,000 charitable deduction (subject to AGI limits for FMV gifts of appreciated property).

  • Donor pays no capital gains tax on $15,000 appreciation.

  • Sell first (assume 15% federal long‑term capital gains rate + 3.8% NIIT = 18.8% total; ignore state tax):

  • Tax on gain = $15,000 × 18.8% = $2,820.

  • After‑tax proceeds = $25,000 − $2,820 = $22,180 donated.

  • Donor claims a $22,180 charitable deduction (cash limit up to 60% of AGI).

Net difference to charity (and tax leverage): $25,000 − $22,180 = $2,820, which equals the taxes avoided by donating the stock directly.

Note: if state capital gains tax applies, the selling tax hit will be larger. Always run the math with your marginal federal rate, NIIT exposure, and state tax rate.

Key IRS rules you must consider

  • Holding period: to deduct FMV, the stock must be long‑term (held > 1 year). Short‑term donations are limited to basis.
  • Deduction limits: FMV deduction for long‑term appreciated securities to public charities is limited to 30% of AGI; cash gifts limit is generally 60% of AGI. Gifts to private foundations have lower percentage limits (20% for FMV property).
  • Documentation: for noncash contributions over $500, complete IRS Form 8283 and attach it to your return. For many securities transferred electronically, charities will provide the required acknowledgement and usually sign Section A of Form 8283 when needed. (See IRS Form 8283 instructions and Pub. 526.)
  • Carryforward: unused charitable deduction amounts can usually be carried forward up to five years.

Sources: IRS Publication 526 and instructions to Form 8283 (https://www.irs.gov/forms-pubs/about-form-8283).

Practical steps to donate stock (operational checklist)

  1. Confirm the charity can accept securities. Not all nonprofits accept direct transfers; check their donation page or development office.
  2. Get the charity’s broker transfer instructions (DTC number, receiving brokerage, account name, and account number). Some charities use donor‑advised fund custodians or brokerages instead.
  3. Instruct your broker to transfer shares in kind to the charity. Provide lot details only if you want a specific tax lot transferred; otherwise most brokers will use FIFO.
  4. Record the transfer date — donation date is the day the charity takes control (typically the transfer date), not the trade date.
  5. Obtain a written acknowledgement from the charity showing FMV, number of shares, date, and a statement if no goods or services were provided. Keep brokerage statements showing the transfer.
  6. Complete Form 8283 if required (noncash gifts > $500). For publicly traded securities, a qualified appraisal is generally not required.
  7. Work with your CPA or tax preparer when filing to ensure proper deduction limits and carryforward calculations.

When selling first can make sense

  • You do not itemize. If you take the standard deduction, donating appreciated securities yields no incremental tax benefit. In that case selling and donating cash (or waiting until you can itemize/bunch) may be appropriate.
  • The holdings are short‑term or have losses. If a security has declined in value, selling the loss to harvest tax benefits and donating cash (or donating the loss‑harvested proceeds) can be better.
  • You need liquidity or prefer to rebalance your portfolio before gifting.
  • You are donating to an organization that cannot accept stock and you don’t want the extra administrative steps. Even then, consider using a donor‑advised fund (DAF) that accepts stock, lets you take the deduction now, and grants later.

Donor‑Advised Funds and other vehicles

Donor‑advised funds (DAFs) are a common intermediary: you donate appreciated stock to the DAF (get the FMV deduction now) and recommend grants over time. This combines immediate tax benefit with flexible timing for charitable grants. See our DAF overview for pros/cons and documentation differences: Donor‑Advised Funds vs Direct Giving: Tax Documentation Differences (https://finhelp.io/glossary/donor-advised-funds-vs-direct-giving-tax-documentation-differences-2/).

For a how‑to on direct gives of equities, see: Stock Donations: Tax Benefits and Process (https://finhelp.io/glossary/stock-donations-tax-benefits-and-process/). For a quick comparison of stock vs cash gifts, see: Giving Stock vs. Cash: Tax and Practical Considerations (https://finhelp.io/glossary/giving-stock-vs-cash-tax-and-practical-considerations/).

Common mistakes and how to avoid them

  • Forgetting to verify the charity’s brokerage instructions. A misdirected transfer can cause delays or loss of tax benefit.
  • Missing the holding‑period rule and claiming FMV for short‑term holdings.
  • Not obtaining a contemporaneous written acknowledgement for donations of $250 or more (required under IRC §170(f)(8)).
  • Assuming all nonprofits can accept securities—their policies and operational capacity vary.
  • Ignoring the AGI percentage limits and carryforward rules; large stock gifts can exceed annual AGI caps.

Lot selection and partial gifts

If you own multiple lots of the same stock purchased at different times and prices, you can usually choose which lot to donate (or sell) to optimize tax outcomes. Donating the highest‑basis lots reduces tax benefit; donating lowest‑basis highest‑appreciation lots maximizes avoided tax and the FMV deduction. Document lot selection clearly with your broker and charity.

Sample decision flow (concise)

  • Do you plan to itemize this year? If yes and you hold long‑term appreciated stock, favor donating in kind.
  • Is the asset short‑term or has a loss? Consider selling (or harvesting losses) first.
  • Is the recipient able to accept stock? If not, consider a DAF as an intermediary.
  • Are you near AGI limits? Coordinate with your tax advisor about bunching or carryforward strategies.

Filing and reporting reminders

  • Attach Form 8283 when required and retain documentation for at least three years (longer if the IRS audits charitable deductions).
  • Charities must provide a written acknowledgement for gifts of $250 or more.
  • For gifts over certain thresholds or complex asset types (closely held stock, real estate, crypto), additional rules and appraisals may apply.

Final considerations and next steps

In my practice, donors with concentrated appreciated positions often generate the largest tax‑efficient gifts by donating shares in kind to charities or DAFs rather than selling first. The tax savings are concrete and frequently increase the philanthropic impact of the gift.

Before acting, run a side‑by‑side calculation using your expected marginal tax rates, estimate NIIT exposure, and include state taxes. Then confirm the charity’s ability to accept securities and document the transfer carefully.

Professional disclaimer: This article is educational and not individualized tax or legal advice. Consult a CPA, tax attorney, or financial planner for guidance tailored to your specific circumstances.

Authoritative resources

Internal resources from FinHelp.io