Ted Sudol, J.D.
Why would a donor consider using depreciated securities to make a charitable contribution this year? After all, such assets are not typically thought of as a good asset for charitable giving.
But this is not a typical year.
The use of depreciated securities may be just the right idea this year when donors plan for their charitable giving. In the currently volatile economic market, many investors are experiencing a depreciation in the value of some (if not all) of their stock holdings. Charitable giving offers a way to optimize the value of depreciated securities.
Here’s why: Unlike gifts of appreciated securities – which create a charitable contribution tax deduction and allow the donor to avoid taxation on the gain in value – gifts of depreciated securities create a capital loss (that can offset capital gains) and the opportunity for a charitable contribution deduction.
- The donor sells securities that have been held for more than a year and have lost value since being acquired.
- The donor then uses the proceeds from the sale to make the charitable contribution.
- This two-step sequence allows the donor to take a capital loss on the sale of the depreciated securities and a tax deduction on the charitable gift.
While tax considerations may not be the number one reason most donors make charitable gifts, the tax-wise aspects of this strategy can be substantial. Let’s say the donor bought 1,000 shares of a stock in 2018 at $60 per share. The stock is now trading at $25. A sale of the stock yields $25,000 in cash and a $35,000 capital loss. The $25,000 can be used to fund a charitable contribution. And, this year, under the Cares Act, the donor can deduct charitable giving up to 100% of Adjusted Gross Income.
Whether the donor plans to make an Annual Fund gift or a payment on a campaign pledge, the use of depreciated securities may be a strategy to consider in 2020.