The year-end holiday season is a prime time for charitable contributions. Whenever you make donations, your best strategy generally is to donate appreciated securities instead of writing checks. If the securities have been held for more than one year, you’ll get a deduction for their full value and avoid paying capital gains tax.
Say you want to donate $1,000 to your favorite charity. You own a mutual fund trading at $20 a share and if you were to sell shares now, you’d have a long-term gain of $8 a share. Therefore, if you were to sell 50 shares to raise $1,000, you’d have a $400 taxable gain and owe $60 in tax, at a 15 percent rate.
Instead, transfer those 50 shares to the charity. You’d get the same $1,000 tax deduction, the charity will get the same amount, and no one will owe any capital gains tax.
On the other hand, you should not donate securities that have lost value. Sell the securities first to lock in the capital loss tax break, then donate the cash to charity.