Philanthropy Series Part Three - Appreciated Securities Giving: Your Portfolio's Peak Performance for Good
If you’re already incorporating charitable giving into your financial plan, donating appreciated assets can be a smart, tax-savvy way to maximize your impact while potentially reducing your tax burden. Think of it as using your portfolio’s peak performance to work for a greater purpose.
Let’s take a closer look at what appreciated assets are and how to strategically incorporate them into your charitable giving strategy.
What Are Appreciated Securities?
Appreciated securities are investments that have significantly increased in value since they were purchased or inherited.
Examples of appreciated securities might include:
Individual stocks
Mutual funds
Exchange-traded funds (ETFs)
Real estate
When it comes time to sell an appreciated asset, you’ll owe capital gains tax on the profit, which is the difference between what you purchased it for and its fair market value (FMV) at the time it was sold. Depending on the asset’s value, this could create a significant tax liability.
Let’s Talk Capital Gains Tax
When sold, the capital gains fall into one of two categories: short-term capital gains or long-term capital gains. Short-term capital gains are taxed at your ordinary income tax rate, meaning they’re often the less tax-efficient option.
If you’ve held onto the asset for more than a year, however, it will meet the criteria to be taxed at a long-term capital gains tax rate, which is generally more favorable. Depending on your other income sources, your long-term capital gains tax rate could be as low as 0% and typically caps out at 20%.
But considering we’re focusing on highly appreciated assets here, it’s more likely you’ve held onto your investment for a long time—enough for it to grow substantially. In that case, your focus will likely be on long-term capital gains tax. While lower than its short-term counterpart, it’s still significant enough to impact your portfolio and total tax liability. It’s also worth mentioning the sale of appreciated assets may be subject to a 3.8% Medicare surtax for some high-earners, depending on their total taxable income.
But for charitably minded investors and families, appreciated assets can become a powerful giving tool.
Let’s say you bought a stock years ago for $10,000 and it’s now worth $50,000. Selling it outright means paying long-term capital gains tax on the $40,000 gain—potentially reducing the amount available to reinvest or donate.
However, if you’re planning to give to charity anyway, there’s a way to avoid the tax hit and make a bigger impact at the same time.
Donating Appreciated Assets
When you donate appreciated securities directly to a qualified charitable organization, no capital gains tax is owed. The charity receives the full market value of the asset, and if you itemize your deductions, you can receive a charitable tax deduction for it as well.
If the charity isn’t equipped to accept non-cash gifts directly, you can still use vehicles like donor-advised funds (DAF) to complete the transfer efficiently.
By donating appreciated assets directly to a charity of your choosing (or your DAF), you can reduce your capital gains tax liability while giving the charity an asset that will likely continue appreciating over time.
Be Strategic with Your Donation
In addition to the potential tax benefits, giving appreciated securities can also be part of your portfolio rebalancing strategy—especially after periods of strong market performance. If a particular asset or holding has grown to make up a disproportionate share of your portfolio, donating a portion of it can help reduce concentration risk without triggering taxes.
If you have some flexibility or you’re following a more long-term philanthropic planning approach, you may also be able to time your donations to align with particularly strong performance years.
Use Your Performance Gains for Good
Donating appreciated securities enables you to give something to charity that will continue growing in value over time. This strategy enables you to smartly leverage your portfolio’s growth while reducing tax liability and supporting the causes that matter most to you.
As always, if you’re considering making a charitable donation or reviewing your portfolio, I’d be happy to help you think through the right timing and strategy for your situation.