Why donating appreciated assets can be more tax‑efficient than selling
When you sell an asset that has increased in value, you generally realize a capital gain and may owe tax on that gain. Donating the same appreciated asset directly to a qualified nonprofit instead usually lets you:
- Avoid paying capital gains tax on the appreciation, and
- Take a charitable income tax deduction equal to the asset’s fair market value (FMV) at the time of the gift if the asset is long‑term and the recipient is an IRS‑qualified public charity — subject to AGI limits and documentation rules (see limits below).
That combination increases the after‑tax value of the gift to charity and, for many donors, raises the net benefit to the donor compared with selling first and donating the cash.
(Authoritative guidance: see IRS Publication 526, Publication 561 and the IRS page “Deductibility of Charitable Contributions” for details.)
Which assets are commonly donated—and special considerations
- Publicly traded stock and mutual funds (most common). If you’ve held the securities more than one year (long‑term), you generally may deduct FMV. Transfers are typically done via electronic brokerage (DTC) or certificate delivery.
- Privately held stock or business interests. More complex: lower section limits, valuation challenges and close attention to private‑company transfer restrictions.
- Real estate. Requires title review, often a qualified appraisal (see Form 8283 rules), and environmental or survey due diligence.
- Bonds, artwork, collectibles. Valuation and deduction rules differ; certain collectibles may be limited to your basis instead of FMV.
- Cryptocurrency. Treated as property by the IRS; donating long‑term crypto can produce similar tax advantages, but many charities lack systems to accept crypto directly (see our guide: “Gifting Appreciated Cryptocurrency to Charities”).
Key IRS rules and documentation you must know
- Qualified recipients: Gifts must be to qualified organizations (usually 501(c)(3) public charities) to get the standard income tax deduction. Confirm the charity’s status (IRS Exempt Organizations Search).
- Holding period: For most property, to claim a full FMV deduction you must have held it more than one year (long‑term). If you’ve held property one year or less, deduction is limited to your cost basis.
- AGI limits: Gifts of long‑term appreciated capital gain property to public charities are generally limited to 30% of your adjusted gross income (AGI). If your deduction exceeds the limit, you may carry forward the unused portion up to five tax years. Cash gifts have different limits. (See IRS Publication 526 for current limits.)
- Form 8283 and appraisals: You must complete IRS Form 8283, “Noncash Charitable Contributions,” when noncash donations exceed $500. If you donated non‑publicly traded property (including real estate) with a claimed value over $5,000, you generally must obtain a qualified appraisal and include Section B of Form 8283 and the appraisal summary with your return. Publicly traded securities typically don’t require a qualified appraisal but still must be reported. (See IRS Form 8283 and Publication 561.)
- Filing year: The deduction is taken on the tax return for the year in which the gift is completed (the date title or control transferred). For securities, this is often the transfer date into the charity’s brokerage account.
(Authoritative sources: IRS Publication 526, Publication 561, and Form 8283 pages.)
Step‑by‑step: How to donate appreciated securities or property
- Confirm the charity can accept the asset type. Large nonprofits commonly accept stock; smaller groups may not have the infrastructure.
- Determine whether the asset is long‑term (held >1 year). Long‑term assets usually allow FMV deduction.
- Contact your broker or the charity to get transfer instructions (DTC number, account name, accepting broker, or transfer agent details). For real estate, ask the charity’s gift acceptance policy and any due diligence requirements.
- Complete any forms the charity or broker needs. For noncash gifts >$500, prepare to file Form 8283 with your return; for gifts >$5,000 of nonmarketable property, arrange a qualified appraisal.
- Transfer title or initiate the electronic transfer. Keep confirmations — broker statements, charity acknowledgment letters and completed Form 8283 — for your records.
- Claim the deduction on your tax return, observing AGI limits and carryover rules if applicable.
Practical examples (numbers simplified)
Example 1 — Publicly traded stock (long‑term): You bought stock for $5,000. It’s now worth $15,000. If you donate the shares directly to a qualified public charity, you generally:
- Avoid paying capital gains tax on the $10,000 of appreciation, and
- May claim a charitable deduction for the $15,000 FMV (subject to AGI limits).
Example 2 — Real estate: You own a rental property bought for $100,000 now worth $300,000. Donating it requires an appraisal, title and environmental checks. If accepted, you generally avoid capital gains on the $200,000 gain and may deduct the $300,000 FMV subject to limits. Many charities prefer to sell real estate quickly; discuss sale timing and carrying costs with the nonprofit in advance.
Common pitfalls and how to avoid them
- Don’t assume every charity can accept noncash gifts. Always confirm capacity and transfer instructions.
- Failing to use the proper transfer method can inadvertently trigger a sale by you (taxable event). For securities, use an in‑kind transfer (broker‑to‑broker or DTC) rather than selling and donating cash unless that’s intentionally planned.
- Missing Form 8283 or appraisal attachments can cost you a deduction. Keep documentation organized.
- Mistaking donor‑advised funds for immediate gifts: contributions to a DAF are treated as contributions to a public charity for deduction limits, but DAF distributions are controlled by the sponsoring organization — donations into a DAF are irrevocable and deductible, but grants from the DAF may be recommended by you over time rather than immediately paid to operating charities. See our glossary entries on Donor‑Advised Funds (DAFs) and How to set up a donor‑advised fund.
Strategies to increase tax efficiency
- Bunch donations: Combine several years of intended giving into one tax year to itemize and exceed the standard deduction threshold (see our glossary article on “Bunching Strategies to Maximize Charitable Deductions”).
- Use a donor‑advised fund: Contribute appreciated securities to a DAF to claim an immediate deduction and spread grants to charities later.
- Consider a charitable remainder trust (CRT): A CRT can sell appreciated assets without immediate capital gains tax inside the trust and pay you income; the remainder goes to charity and you receive a partial deduction (complex and requires professional setup).
State tax nuances and other taxes
State treatment of charitable deductions varies: some states conform to federal rules while others limit or disallow itemized deductions. Also consider the 3.8% Net Investment Income Tax (NIIT) that can apply to high‑income taxpayers on investment gains; donating appreciated assets may reduce NIIT exposure by avoiding a taxable sale. Always check state rules and consult a tax advisor.
When FMV is not allowed — ordinary‑income property and partial interests
If you donate property that would have generated ordinary income on sale (for example, inventory or property held one year or less), your deduction may be limited to your cost basis rather than FMV. Donations of partial interests (retained life estate or partial business interests) have special rules that often preclude taking a FMV deduction for the entire donated interest. See IRS Publication 526 for detailed examples.
Recordkeeping checklist
- Charity acknowledgment letter (must state whether you received any goods/services in return).
- Broker transfer confirmations and account statements showing the transfer date and number of shares.
- Completed Form 8283 if required (attach appraisal summary when required).
- Qualified appraisal report (when required for nonpublicly traded property over $5,000).
Professional takeaway and real‑world counsel
In my practice as a tax and financial planner, donating appreciated assets is one of the most underused tax‑efficient giving strategies. Clients who coordinate their investment and giving plans often stretch their philanthropic dollars while reducing their tax bills. Before acting, confirm the charity’s ability to accept the gift, gather appraisal and transfer paperwork, and run numbers to compare selling‑then‑donating vs donating in‑kind — the advantage is most clear when appreciation and high capital gains rates would otherwise erode the donation.
Where to learn more and take next steps
- IRS Publication 526, “Charitable Contributions,” and Publication 561, “Determining the Value of Donated Property” (irs.gov) explain limits, valuation and documentation requirements.
- For reporting noncash gifts: IRS Form 8283 instructions (irs.gov).
- See related FinHelp guides for practical advice: Donor‑Advised Funds (DAFs), Giving Stock vs. Cash: Tax and Practical Considerations, and How to Document Charitable Gifts for Maximum Deduction.
Professional disclaimer: This article is educational and not individualized tax or legal advice. Rules change and your situation is unique; consult a CPA, tax attorney or financial advisor before making major charitable gifts.
