Why donors choose gifts of securities or private equity

Donating appreciated securities or private equity is a common tax-smart move for investors. Instead of selling an appreciated asset, paying capital gains tax, and donating the cash, you transfer the asset in-kind to a public charity (or an eligible vehicle such as a donor-advised fund). The charity can sell the donated security without recognizing gain, and you may claim a charitable deduction for the asset’s fair market value (if you held it more than one year). That combination—avoided capital gains and a full-value deduction—often increases the after-tax value of the gift and reduces your taxable income in the donation year.

(Author note: In 15 years advising clients, I’ve seen this approach increase charitable funding while improving donors’ tax outcomes when timed and executed correctly.)

Sources: IRS — Charitable Contributions (Pub. 526) and guidance on substantiation and appraisals (IRS Form 8283 instructions) (https://www.irs.gov/charities-non-profits/charitable-contributions).

Key tax rules and documentation to know

  • Long-term holding requirement: To deduct the fair market value (FMV), the asset generally must be long-term capital gain property—owned for more than one year. If held one year or less, the deduction is limited to your basis in the asset (usually what you paid).
  • Deduction limits: For gifts of appreciated long-term capital gain property to a public charity, the FMV deduction is generally limited to 30% of your adjusted gross income (AGI). Excess may usually be carried forward up to five tax years. Gifts to private foundations have lower FMV limits (commonly 20% of AGI) and different rules. (IRS Pub. 526)
  • Substantiation and forms: Written acknowledgment from the charity is required for contributions of $250 or more. For noncash gifts exceeding $500 you must file Form 8283 with your return. Donated property valued over $5,000 (other than publicly traded securities) generally requires a qualified appraisal and Section B of Form 8283 to be completed and attached. (IRS Form 8283 instructions)
  • Valuation: Public securities’ FMV is typically the average of the high and low trading price on the contribution date. Closely held stock, partnership interests, or private-equity stakes require professional valuation. For private-equity interests, valuation is often complex and must meet IRS standards.

Practical steps: Donating publicly traded securities

  1. Confirm the charity’s ability to accept securities and obtain DTC instructions or the charity’s brokerage account details.
  2. Notify your broker and the charity. Provide the charity with a donor name, approximate number of shares, and the intended gift date.
  3. Transfer the shares in-kind through your brokerage via DTC or an electronic transfer. Keep transfer confirmation.
  4. Obtain a contemporaneous written acknowledgment from the charity showing the date of transfer, name of the asset, and a statement whether any goods or services were provided.
  5. Report the gift on your tax return and attach Form 8283 when required.

Why this matters: Electronic transfer preserves the contribution date and avoids a safeguard sale that could trigger gains.

Practical steps: Donating private equity or partnership interests

Donating illiquid private equity is doable but more complex. These are typical routes:

  • Donor-advised funds (DAFs): Many DAF sponsors will accept privately held securities or limited partnership interests. The sponsor may facilitate valuation, escrow, and eventual liquidation or conversion into diversified holdings for grantmaking. See our guide on Donor-Advised Funds for related options (https://finhelp.io/glossary/donor-advised-funds-pros-cons-and-use-cases/).
  • Direct to charity: Some large public charities and universities can accept private-equity or partnership interests. They often require a review, a qualified appraisal, and legal transfer documents.
  • Private foundation: A private foundation can accept illiquid gifts, but managing and disposing of such assets brings administrative burdens and tax rules (self-dealing, excess business holdings).

Steps to follow:

  1. Confirm the charity or DAF sponsor will accept your specific class of interest.
  2. Obtain a qualified appraisal to support FMV if the gift is over $5,000 (and is not publicly traded). The appraisal must meet IRS requirements.
  3. Draft and execute transfer documents (assignment of partnership interest, amended limited partnership agreement, K-1 coordination, etc.). Legal counsel is strongly advised.
  4. Complete Form 8283 Section B if required and attach the appraisal. Monitor any post-gift charity disposition rules.

Tip: If your private-equity stake has restrictions (transfer limitations, lockups, or buy-sell provisions), the charity may not be able to accept or may place a reduced valuation. Early coordination with all parties avoids wasted effort.

Valuation pitfalls and special rules for private equity

  • Discounts and restrictions: Valuation often reflects minority-interest discounts, lack of marketability, and contractual transfer limits. That can reduce the deductible FMV.
  • Related-party and self-dealing rules: Transfers that trigger self-dealing or impermissible transactions (especially with private foundations) carry penalties.
  • Charity disposal: If a charity sells a donated asset within three years, it may need to file Form 8282 and you could be required to reduce your deduction in certain limited circumstances if the charity disposed of the property in a disqualifying manner.

Example scenarios (illustrative)

1) Public stock: You bought stock for $10,000 (basis) that’s now worth $40,000. If you sold it, long-term capital gains tax (say 15% federal plus possible NIIT 3.8% and state tax) would apply to the $30,000 gain. By donating the shares directly to a qualified public charity you generally avoid that capital gains tax and may claim a $40,000 charitable deduction (subject to AGI limits).

2) Private-equity stake: You hold a limited partnership interest acquired for $25,000 now valued at an appraised $250,000. Donating directly to a university that accepts the interest could yield a $250,000 deduction (subject to limits), but the university may require a qualified appraisal and may discount the valuation for transfer restrictions. Using a DAF that accepts the interest can simplify processing and allow you to recommend grants over time.

Who benefits most

  • Investors with large unrealized gains who want to increase charitable impact without incurring immediate capital gains tax.
  • Donors with concentrated positions who want to diversify their holdings while supporting charities.
  • Business owners or partners with carried interest or partnership interests looking for a charitable exit strategy.

Common mistakes to avoid

  • Failing to confirm acceptance: Not all charities accept private-equity or closely held stock.
  • Missing documentation deadlines: Lacking written acknowledgment or Form 8283 can disallow or delay deductions.
  • Incorrect valuation: Overstating FMV without a qualified appraisal increases audit risk.
  • Donating depreciated assets: If an asset is worth less than your basis, it’s usually better to sell, take the loss, and donate cash.

Tax planning considerations

  • Timing: If you expect lower taxable income next year, shifting the gift might increase your tax benefit. Conversely, bunching several years of gifts into one year (or using a DAF) can help you exceed standard deduction thresholds.
  • Interaction with capital gain rates and NIIT: State taxes, the federal long-term capital gains rate (0/15/20% depending on income), and the 3.8% Net Investment Income Tax can change the effective tax saving from donating vs selling.
  • AGI limits and carryforwards: If your charitable deduction exceeds AGI limits, you can carry the excess forward for up to five years.

Helpful internal resources

Final professional tips

  • Coordinate early with the receiving charity, your broker, and your tax advisor. Transfers of illiquid assets can take weeks or months to complete.
  • Always get contemporaneous written acknowledgments and, when required, a qualified appraisal and properly file Form 8283.
  • Consider using donor-advised funds or charitable remainder trusts as practical alternatives when charities cannot accept illiquid assets directly.

Professional disclaimer: This article is educational and does not constitute tax or legal advice. Tax rules change and outcomes depend on your facts; consult a CPA, tax attorney, or qualified financial advisor for guidance tailored to your situation.

Authoritative sources: IRS — Charitable Contributions (Pub. 526) and Form 8283 instructions (https://www.irs.gov/charities-non-profits/charitable-contributions); SEC guidance on private equity considerations (https://www.sec.gov/spotlight/private-equity).