Donating appreciated stock to charity can unlock significant tax savings. By giving stock instead of cash, you can avoid capital gains taxes and still claim a charitable deduction. But with IRS substantiation rules tightening, it’s critical to document donations properly to protect your deduction in 2025 and beyond.
Why Donate Stock Instead of Cash?
Contributing long-term appreciated stock to a qualified charity allows you to:
- Avoid capital gains tax on the appreciation.
- Deduct the full fair market value (FMV) if held more than one year.
- Support charitable causes without reducing cash flow.
Example: If you bought stock for $5,000 that is now worth $25,000, donating it directly avoids paying capital gains tax on the $20,000 gain while giving you a $25,000 deduction.
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IRS Rules on Stock Donations
- Stocks must be held for more than 12 months to deduct FMV.
- Short-term holdings are deductible only at cost basis, not FMV.
- Donations are deductible up to 30% of AGI for publicly traded securities.
- Excess contributions can be carried forward for five years.
Substantiation Rules: Documentation Requirements
The IRS requires strict documentation for stock donations. To protect your deduction:
- Written acknowledgment from the charity for gifts over $250.
- Form 8283 must be filed for donations over $500.
- Qualified appraisal is required if donating non-publicly traded securities valued above $5,000.
- Retain brokerage statements to prove transfer of ownership.
Timing Matters for Tax Savings
The deduction applies in the tax year when the stock transfer is complete. For year-end planning in 2025, ensure your broker executes the transfer before December 31. Waiting until January could push the deduction into 2026.
Best Practices for Taxpayers
- Work with your broker and charity early to avoid delays.
- Confirm the charity is an IRS-qualified 501(c)(3) organization.
- Keep detailed records and acknowledgments for IRS compliance.
- Coordinate stock donations with other itemized deductions to maximize tax benefit.
Example: High-Income Taxpayer
Sarah, a high-income taxpayer, owns $100,000 of stock purchased for $40,000. If she sells, she owes capital gains tax on $60,000. Instead, she donates the stock directly to a charity. She avoids the capital gains tax and claims a $100,000 deduction (subject to the 30% AGI limit).
Key Takeaways
- Charitable stock donations maximize giving and tax savings.
- Donors avoid capital gains taxes while deducting FMV.
- IRS substantiation rules are strict—documentation is critical.
- Plan ahead to ensure timely transfers and compliance.
