Giving "Un-appreciated" Stock

Suppose a donor called your charity today and told you she wanted to give you some stock. You would, of course, thank her, provide instructions as to how the stock should be transferred, and get basic information about the stock so you would know what to expect. But is that all you need to know? Are you giving your donor the necessary information so that she maximizes her benefits from the gift? When is it not smart to give securities like stock directly to a charity?

Most nonprofits are accustomed to encouraging their donors to give stock directly to the charity rather than selling the stock. They may not realize that sometimes it is better for the donor to sell the stock & give the proceeds.

We all know that by giving appreciated stock directly to a charity rather than personally selling the stock, a donor will benefit by not incurring a capital gains tax liability on the appreciated value of the stock. The donor will also be able to claim a charitable deduction for the fair market value of the stock on his/her income tax in the year of the gift if the donor itemizes. But what if the stock has actually lost value and the donor has a capital loss rather than a capital gain?

In today's economic environment of declining stock values, a donor interested in giving a stock gift must carefully consider the tax consequences of his actions. If a donor wants to give you stock that has lost value since its purchase, there is a more advantageous way a donor can get rid of the stock than by donating it directly to the charity.

For example, consider this scenario. Mr. Jones purchased a stock several years ago and paid $10,000 for the stock. Today, the stock's market value is only $6,000. Mr. Jones has decided that he wants to get rid of the stock because he thinks the company is no longer a good investment. He can give the stock directly to his favorite charity and wash his hands of it. In this case, since he itemizes his deductions he can claim a charitable tax deduction for $6000 after the stock is transferred. Good for the donor, good for the charity, right?

Unfortunately, if the donor simply gives the stock to the charity, he cannot then claim a $4,000 loss on his income taxes as he could if he sold it himself. You might suggest instead, that Mr. Jones go ahead and sell the stock, giving your charity the proceeds. The charity benefits equally from either option, but Mr. Jones benefits much more from the direct sell option. He not only can claim a $6000 charitable deduction for the gift, but he can also offset any capital gains tax liability he may have for the year by claiming the $4,000 loss on the donated stock. When stock has depreciated in value, it is almost always more beneficial to the donor to sell the stock himself and give the proceeds to the charity.

Your donor may be a very savvy investor who knows all about buying and selling stocks, but he/she may not be. If you have a planned giving officer on staff, they will be aware of the difference between giving appreciated and depreciated stock. Other staff members who talk with donors, however, may not realize they need to ask the question. It would be wise to train them so that your donors do not throw away a perfectly good tax deduction!