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October 31, 2017 at 08:00 PM
With equity market returns at eye-popping levels over the last several years, many investors hold securities that have appreciated in value. That’s good news, but selling those securities can potentially mean higher taxes. Yet again, there’s a positive: If you have held your appreciated securities for more than one year, you can donate them to charity and not only claim a tax deduction for their full fair market value but also avoid capital gains tax.
US equity markets have returned 346% since the bottom of the bear market in March 2009.¹ They were up 94% just over the last five years, August 31, 2012, to August 31, 2017. With those kind of returns, investors are increasingly donating appreciated securities.
For example, over the last five calendar years, 58% of the total contributions to donor-advised fund Vanguard Charitable were appreciated securities—stocks, bonds, mutual funds and ETFs. In the June 2016 to June 2017 period alone, 64% of contributions were appreciated securities, compared to 55% in the same period the previous year.
Tax treatment of appreciated securities
The tax treatment of a gift of appreciated securities will differ depending on the type of securities donated, along with other factors. Please consult with your tax advisor before making a decision.
The right time to donate appreciated securities
If you hold appreciated securities and are considering donating them to charity, you might be wondering when you should make the contribution. After all, the market may keep going up and you might capture even more value. On the other hand, the bull market can’t go on forever and a market reversal could pull down the value of those shares.
Either way, charities stand to gain. So the answer depends on a number of factors, including the need for portfolio rebalancing and personal charitable goals (i.e., to make a large gift at a designated time or to fund a specific purpose for a charity). It’s a good idea to discuss these considerations with your advisor before you give.
In particular, rebalancing your portfolio can be an ideal time to gift appreciated securities. Rebalancing is buying and selling securities in your portfolio to bring it in line with your preferred asset allocation (the way you divide your portfolio among asset classes to balance risk and return). Rebalancing is generally recommended when your asset allocation is 5% or more away from your target allocation. Rather than selling appreciated securities when you rebalance, consider donating them instead. It can be good for your portfolio, your tax bill, and your favorite charity.
