Elias bought stock five years ago for 4,000 dollars. It is now worth 15,000 dollars, and he donates the shares directly to a qualified public charity rather than selling them first. What is the general federal tax result?
- A.He may deduct the 15,000 dollar fair market value, subject to adjusted gross income limits, and owes no capital gains tax on the 11,000 dollars of appreciation.Correct. Direct donation of long-term appreciated stock generally allows a fair market value deduction with no recognition of the built-in gain.
- B.He may deduct 15,000 dollars but must also report an 11,000 dollar capital gain.There is no sale, so there is no realization event. Avoiding the gain entirely is the main appeal of donating the shares directly.
- C.He receives no deduction, because gifts of appreciated property to charity are not deductible.Contributions of securities to qualified charities are deductible. Only the amount and the applicable limits vary by holding period.
- D.He may deduct only his 4,000 dollar cost basis.Basis-only treatment applies to short-term appreciated property and certain other categories. Long-term appreciated securities generally qualify for full value.
Why: Donating long-term appreciated securities directly gives a double benefit. Elias may generally deduct the full 15,000 dollar fair market value, subject to adjusted gross income percentage limits, and because he never sold the shares he never realizes the 11,000 dollars of appreciation. Selling first and donating the cash would have triggered tax on that gain. Review charitable contributions of securities in the taxation topic.
Elspeth Carrow has held shares of Verrick Labs for nine years. Her cost basis is 20,000 dollars and the position is now worth 90,000 dollars. She wants the whole position to go to a public charity and asks whether she should donate the shares directly or sell them and donate the proceeds. Assume her deduction falls within all applicable adjusted gross income percentage limits. Which advice is correct?
- A.Either route produces the same outcome, since a charitable deduction and a capital gain offset each other exactly.Wrong. They do not offset. Donating the shares avoids the gain entirely while still yielding a full fair-market-value deduction.
- B.Her deduction is limited to her 20,000-dollar cost basis under either approach.Wrong. Basis limitation applies to short-term capital gain property; long-term appreciated securities are deductible at fair market value.
- C.She should sell first, because gifts of securities are deductible only at basis while cash gifts are deductible in full.Wrong. This reverses the rule and needlessly triggers a 70,000-dollar long-term capital gain.
- D.She should donate the shares directly, deducting the 90,000-dollar fair market value and avoiding recognition of the 70,000-dollar long-term gain.Correct. Long-term appreciated securities given to a public charity yield a fair-market-value deduction with no gain recognized.
Why: A gift of long-term appreciated securities to a qualified public charity is deductible at fair market value, and the donor never recognizes the built-in capital gain. Donating the shares directly therefore produces a 90,000-dollar deduction and permanently avoids tax on the 70,000-dollar long-term gain. Selling first would trigger that gain, leaving her with less after-tax cash to give and the same or a smaller deduction. The fair-market-value treatment depends on the property being long-term capital gain property; had she held the shares one year or less, the deduction would be limited to basis.