Charitable Giving with Appreciated Stock and Donor-Advised Funds

Not tax or financial advice. I’m not an accountant or financial advisor, and tax laws change. Talk to a professional before acting on any of this.

Charitable giving protips for people for whom the following is true:

You want to be generous and give to charities/nonprofits
You have stock investments in a regular (taxable) investment account (not a 401k/IRA)
You live in the USA

Tip 1: Give appreciated stock directly to charity

You can give appreciated stock that you’ve held for more than a year directly to charity. This results in you never having to pay capital gains tax on the appreciation. The charity gets the appreciated stock’s full value and can sell it tax-free immediately. You get the full appreciated value as a tax deduction.

This is a great way to take advantage of stock growth and give in a more tax-advantaged way. You just have to find nonprofits who are set up to accept stock donations. Tons of them are, you just have to ask. (Sometimes there’s a minimum donation of $1k in value.)

If you still want to keep investing in the stock you gave away, nothing stops you from buying more shares at the current price to reset your cost basis. Wash sale rules don’t apply here.

Tip 2: Use a donor-advised fund

A special account called a donor-advised fund (DAF) takes this idea and makes it even better. Rather than donating stock directly to charity, you set up a DAF and transfer shares there. They are liquidated upon receipt, and the funds remain there until you issue grants to charities.

Advantages:

Separate timing. The timing of exiting a stock and donating it can now be separated. If you want to exit an appreciated stock now for any reason, you can do that and immediately get the tax deduction, even if you’re not yet ready to give it to a specific charity. It sits until you grant it.
Smaller grants. Your grants can be in much smaller amounts (e.g. as low as $50), since the charities just receive cash.
One transfer. It’s easier to give/transfer shares to only one place rather than coordinating stock transfers with individual charities.

Setting up a donor-advised fund was much easier than I expected. Fidelity Charitable offers them with a smooth flow for contributing and issuing grants.

Tip 3: Alternate years between itemizing and the standard deduction

Another tax + giving optimization tactic DAFs can help with is allowing you to alternate years between taking the standard deduction and itemizing, while a 501(c)(3) still gets the same amount annually, by alternating years between lumpy DAF contributions and then $0 donations.

Hope this helps you maximize your giving!

Thanks to @NathanTsoi, who first told me about donor-advised funds!

This was originally posted as a Twitter thread in February 2018. The last tip was added to the thread in July 2021.