Looking to lock in on a long-term gain? Donating to a charitable cause is one way to avoid heavily-taxed capital gains—and the best way to minimize the tax impact on a sale of appreciated stock.

If you’ve owned a stock for more than one year, and have unrealized gains above your purchase price, you may take a charitable deduction for the full market value of the stock by gifting the stock to a charity. Both you and your selected charity completely avoid capital gains tax when the stock is sold.

This method of charitable giving is much more effective than selling the stock and contributing the sales proceeds, in the form of cash, to a charity. The benefits include a larger gift to the charity, as well as a higher charitable deduction and lower tax for you, the donor.

The current bull market is the third longest in U.S. Stock Market history. On March 9, 2016, we celebrated the seven-year anniversary of the low point of the S&P 500 during the Great Recession. While no one knows for sure how long this recovery will last, for the time being, appreciated stock shouldn’t be hard to come by.

Here is a practical example of you can sell appreciated stock tax free:

Five years ago, you purchased 100 shares of XYZ Corp. at the price of $100 per share for a total cost of $10,000. If you can now sell XYZ Corp. at $250 per share, for a total of $25,000, this transaction would result in a capital gain of $15,000.

Referencing the current capital gains tax rate table below, the tax consequence of this sale—if you fall in the 25 to 35 percent tax bracket, like the majority of Americans—would be $2,250 (15 percent times $15,000). So if you wanted to give the net after tax proceeds to a charity, your gift and charitable deduction would be based on $22,750 ($25,000 minus $2,250).

If you are in the 10 percent or 15 percent tax bracket, there is no capital gains tax implication and therefore no disadvantage in selling appreciated stock. Please note that the key here is long-term (more than one-year) capital gains, as short-term capital gains are taxed at your ordinary income tax rate. When giving securities held for less than a year, the charitable deduction would be based on your original cost basis of the stock.

Here is another option: rather than sell the stock, you could also gift the stock directly to a charity at the current market value. This value is typically determined by the charity by using a simple average of the high market price and the low market price on the date the gift was received. The charity would receive the full valuation (in this case, $25,000) and you, the donor, would receive the maximum benefit of the full charitable deduction for tax purposes. This transaction optimizes the value of the stock and lowers the tax burden for the donor because of the charitable deduction, providing the greatest contribution possible to a charity’s mission.

While the example above depicts an outright charitable stock gift, the same rule can be applied to planned gifts should your charity have an established program for vehicles such as charitable gift annuities, charitable trusts, donor advised funds, etc.

So the next time you look at your portfolio and think it might be the right time to lock in a long-term gain but are concerned about the tax implications, consider the value of contributing that stock to a deserving charity of your choice.

Capital Gains Rates

Capital gains rates are designed to encourage long-term investing. Most people can get a significant advantage from holding stock investments for more than one year. Short-term gains on stock investments are taxed at your regular tax rate; long-term gains are taxed at 15 percent for most
tax brackets and zero for the lowest two.

Capital Gain Tax Rate
Tax Bracket Short Term Long Term
10% 10% 0%
15% 15% 0%
25% 25% 0%
28% 28% 15%
33% 33% 15%
35% 35% 15%
39.6% 39.6% 20%

To learn more about minimizing the tax impact on the sale of appreciated stock, contact one of our Regional Advisors by calling 800-549-3328 or visiting our
“Contact Us” page.

Please refer to the IRS guidelines and your tax preparer regarding your eligibility and the documentation required for deducting charitable contributions.