Tax Strategy: Stock Donations and Open Market Buying
overview
If you donate, make sure to get the most financial benefits in your investments through tax strategy.
Stock donations with open market buying can help you avoid paying any capital gains taxes, and receive a charitable contribution deduction up to 3x times more tax-effective.
When you’re giving, there’s various ways you can optimize your donation. One is timing a stock donation with open market buying of the same stock and number of shares you just donated. This could lead to tremendous tax savings.
Stock donations with open market buying can be over 3x more tax efficient.
If you are bullish on the market, you may want to maintain the current investment positions in your portfolio. This doesn’t have to stop you from donating some of your appreciated shares to offset your capital gains tax. On the same day you donate your shares, you can use the cash you would otherwise have donated to buy the same stock in your brokerage account.
Example
Let’s use an example: Sarah bought Apple shares for $3,000 in January 2018. By February 2019, those same shares are worth $6,500 on the open market. Sarah knows that she wants to make a charitable contribution.
Instead of giving cash, Sarah makes her donation of $6,500 using her Apple appreciated stock. That same day, she uses $6,500 cash to purchase the same number of Apple shares she donated. Three things happened here: 1) she made a donation worth $6,500, which the charity keeps when they sell the stock, 2) she is able to deduct the full $6,500 on her tax return, and 3) her Apple shares are no longer taxable is she sells at the current price. It’s a benefit for everyone.
Eventually, Sarah will sell these shares. If it remains at the current price, she pays no taxes. However, if she sells them at a gain, her taxes will be based on the appreciation from $6,500, not from her original $3,000 cost. If she sells them at a loss, she will get all of the loss deduction benefits from her new adjusted cost of $6,500.
Tax Benefit of Donating Stock and Open Market Buying
After the cost basis is set to $6,500, future sales at a loss within one year can be deducted as ordinary income. Using the donate and open market buying strategy, if she sells at $5,000, she can get up to a 49% credit, $735, on her tax return. In comparison, if Sarah never used this strategy and held the shares the whole time, selling at $5,000 would need to pay taxes on her gain (about $740). Using this approach, she’s able to recoup 30% additional value.
If the price continued to appreciate from $6,500, the tax incentives are equally beneficial. If the Apple shares were later sold for $8,000, this gain would be based on the new adjusted price paid. Upon selling, she would need to pay $555 in tax on her gains. In comparison, if she didn’t implement donating and open market buyingm, she instead would be paying $1,850 to the IRS, which is 3.3x more.
Applying this strategy also works for employee restricted stock units. Stock donations and open market buying is not considered a wash sale because the stocks are sold by the charity at a gain.
Making the most of your money doesn’t have to be complicated. With some simple strategizing, Sarah was able to avoid paying capital gains tax, take a larger deduction on her taxes, and set herself up for success with her new shares. This is an excellent strategy for anyone who wants to donate stock while maintaining the asset balance of their portfolios. Using a stock donation service such as Cocatalyst makes the process as simple as donating cash. Visit our article on How To Donate Stock to a Charity to learn more, or visit our Start Donation page if you’re ready to donate today.
Donating appreciated stock is the most tax-efficient way to make your charitable donations.