photo from dreamstime.com

By Steven Jon Kaplan

Many people who think they have little in the way of disposable income may have considerable stock holdings that they’ve acquired through inheritance or regular contributions to a mutual fund. Perhaps they have accumulated stock through an employee stock ownership plan, or through stock options that some companies offer employees in lieu of larger salaries. These stockholders may not have large salaries or substantial amounts of cash on hand. Perhaps they are very committed to The Vegetarian Resource Group and its mission, and would like to make a donation, but a large cash gift, for whatever reason, is unfeasible.

For example, let’s consider the Smiths, an imaginary family of four, whose annual household income is $50,000. The Smiths are very committed vegans and live frugally. Their $50,000 income must cover a mortgage, child care, health insurance, contributions to a 401(k) plan, and savings for future expenses. The Smiths donate $1,000 to The VRG every year for promotion of vegan options in restaurants and other food service venues. They would love to be able to make a larger gift of $10,000, but their other obligations make that seem impossible. However, ten years ago Mrs. Smith inherited 1,000 shares of stock in Yummy Veggie Dinners Inc. The shares are in the Smiths’ brokerage account. Since her inheritance, these shares have increased in value from $2,000 to $10,000, an impressive $8,000 gain.

While she would like to make a substantial gift to The VRG, it has never occurred to Mrs. Smith to donate stock. Yet by doing so, she can make that $10,000 gift she could not otherwise afford.

Even though the Smiths could never manage a cash gift of this magnitude, once they consider their stock holdings, their giving capacity increases significantly. They are now able to help The VRG, while leaving their 401(k) and savings plans untouched.

Substantial Tax Savings

Consider the Smiths’ case when they are a higher income family. If they sell their 1,000 shares of stock and donate the proceeds, they would have to first pay tax on the $8,000 profit. With a capital gains rate of 10% (for example), the Smiths would owe $800, leaving them with only $9,200 to donate to The VRG, instead of the $10,000 they’d planned. The Smiths would be much happier if they could give the entire $10,000 to The Vegetarian Resource Group. Donating the stock directly allows them to do this. Another tax advantage comes with the Smiths’ itemized deductions. If they sell the stock, pay the 10% capital gains tax, and donate the remaining $9,200, they can deduct that $9,200, yielding an income tax savings of $1,380 (assuming a 15% tax bracket). However, by donating the stock directly to The VRG, the full $10,000 can be deducted, for an income tax savings of $1,500. Both the Smiths and The VRG benefit from this arrangement. When to Donate Securities: The ideal time to donate any security is under the following two conditions: 1) you have a net gain on the stock, bond, fund, or other security; and 2) you have owned the security for at least one year and one day. You will not have to pay capital gains on the increase and the entire value of the donation will qualify for charitable contributions on Schedule A. If you have purchased that security at different times at different prices, your separate purchases (called lots) with the lowest prices will usually have the highest unrealized capital gains and are the shares you should donate.

If you are in a low tax bracket, then your long-term federal capital gains tax will be zero. In that case, either 1) donate cash if you have not already used up your annual limit of one thousand dollars per person (two thousand combined per married filing jointly) if you are taking the standard deduction; or 2) donate either shares or cash directly from your traditional retirement account to VRG. Choice #2 is only valid for tax savings if you are at least 70-1/2 years of age. Whether or not you get a federal tax break, some states and/or localities will give you a tax rebate for charitable contributions.

If you have held a security for one year or less, or if you have a net loss, then do not donate it yet. Instead donate cash.

There are several problems with donating stock that you have held for one year or less. For one thing, you are not allowed by IRS regulations to avoid paying capital gains tax on such a short-term gain in the stock price. You will therefore have to pay taxes on the full capital gain in the stock, even though you donated it.

Another problem is that if you donate a stock that you have held for one year or less, you probably could have waited a few more months until it reached one year and one day, at which point you could have avoided the entire capital gain. You should always keep track of when your shares will reach the one year and one day mark. Most brokers do this for you automatically.

Most importantly, if you donate a stock that has a short-term capital gain, the IRS will think that you might be trying to evade taxes and they will be much more likely to audit your return. Any instance in which the IRS is much more likely to audit you, you should go out of your way to avoid. Keep an eye on your security; as soon as it meets both of the above conditions then it will be worthwhile to consider for donation.

If you don’t have any assets with long-term capital gains, then you are much better off just writing a check. That would be especially true in 2026 when you can get one thousand dollars per person for cash/check donations per calendar year, ($2,000 per married couple), even if you use the standard deduction. If you donate stock then this doesn’t qualify for this purpose, only a cash or a check.

This is not personal tax or legal advice, which you should obtain from your tax or legal advisor for your individual situation.