Got Capital Gains? How to Donate Them to Save on Taxes
The bear market may be dampening your giving spirit, but when those capital gains return, you can donate them to reduce your tax liability.
Oct. 4 2022, Published 1:15 p.m. ET
If you see the term “capital gains” and think it isn't relevant during a bear market, that’s true for some, but not all, investments. Certain stocks and funds have fared well this year despite the broad downturn, leaving some folks with capital gains. Whether or not that’s your story these days, you should know that you can donate your capital gains to reduce your tax burden.
Here’s how — and why — to donate to charities of your choosing via your capital gains instead of using your cash reserves.
Did you know you can donate your long-term capital gains?
For long-term capital gains, or capital gains for sold assets that you held for a year or more, the benefits are twofold.
On one hand, the long-term capital gains tax rate is much friendlier (read: lower) than the short-term capital gains tax rate. Whereas long-term capital gains taxes range from 0 percent–20 percent depending on an investor’s income, short-term capital gains taxes can be as high as 37 percent.
Investors can also use long-term capital gains to donate to charitable organizations. This isn't possible with short-term capital gains.
There are perks to donating with capital gains instead of cash.
By donating your long-term capital gains instead of selling them and taking the cash, you can:
- eliminate taxes up to 20 percent on those gains
- deduct the fair market value of your donation from your income
When you donate with cash, you only get to deduct the fair market value of your donation from your income. If you’re already an investor and taking capital gains on sold assets, donating with cash instead of capital gains costs you more money.
Any asset subject to long-term capital gains taxes can be used as a donation vehicle. This means stocks, funds, real estate, shares of a private company, and even cryptocurrency that you held for at least one year before selling at a profit are all eligible.
By donating your appreciated securities, you may even be able to donate more money than you initially planned. With a reduced tax burden, you can use that 20 percent of gains you saved and put it toward the donation itself. Of course, you can then subtract the new fair market value from your income as a charitable deduction.
Here's how to donate your capital gains.
Keep these tips in mind before donating your capital gains:
DON’T SELL THE APPRECIATED ASSET YOU WANT TO DONATE. Once you sell at a profit, you have “realized gains,” which get hit with capital gains taxes.
Instead, transfer the security to the charitable organization of your choosing. You may have to reach out to the nonprofit or other institution to see if they have a protocol for transferring securities.
Write off the donation on your taxes. Use the asset’s fair market value at the time of the donation.
Although the process is simple, it may be best to work with a tax or investment professional to be sure you’re going about it the right way. You can also utilize a donor-advised fund to streamline the process.