Appreciated non-cash assets

If you have a donor-advised fund (DAF) account, simply transfer the asset to the account and qualify for a fair market value tax deduction, if you itemize, on the date of transfer. You pay no capital gains tax when the assets are liquidated, the cash proceeds can then be invested, and you can recommend grants to your favorite charities immediately or over time at your convenience.

Please be aware that gifts of appreciated non-cash assets can involve complicated tax analysis and advanced planning. This article is only intended to be a general overview of some donation considerations and is not intended to provide tax or legal guidance. In addition, all gifts to DAFs are irrevocable. Please consult with your tax or legal advisor.

Non-cash asset gift options

The purpose of this next section is to highlight various assets you might donate to a DAF or other public charity. We review the following appreciated asset gift options: 

• Publicly traded securities
• Restricted stock
• Privately held business interests
• Real estate
• Cryptocurrency
• Fine art and collectibles
• Life insurance
• Equity compensation awards
• Post-IPO stock
• Private equity fund interests

Publicly traded securities 

Shares of appreciated publicly traded securities, such as stocks and mutual funds, are relatively easy to donate. To potentially receive the tax benefits highlighted above, shares should be held for more than one year and you must transfer the shares directly to a DAF or other public charity. Selling the appreciated shares first will trigger capital gains tax liability. 

Appreciated securities held for more than one year and contributed to a DAF or other public charity may be donated without incurring any capital gains taxes and are generally deductible at fair market value.

Restricted stock

If you are an executive with a concentrated and/or restricted position in a public company’s stock, you may be able to donate shares to help reduce potential taxes on your position. 

There are unique considerations with gifts of restricted stock that you will want to consider. For example, if your stock is restricted by legend or is “control” stock owned by an affiliate of the issuer (i.e., you are an officer, director, or 10% shareholder), then your company’s general counsel must give you permission to transfer the stock to charity. Restricted stock also must be sold in accordance with Rule 144 resale restrictions.¹

Contributions of restricted stock to a DAF or other public charity may be deductible at fair market value on the date of contribution, but valuation discounts can apply if restrictions are not lifted prior to gifting. A qualified appraisal may be required to substantiate the fair market value. 

Privately held business interests (C-Corp, S-Corp, LP, LLC)

If you are considering a sale of an interest in a privately held company, you may find that donating a portion of your long-term held interest to a DAF or other public charity before the sale can help to reduce your tax burden and enable you to give generously to charity.

Considerations include:

• A possible sale is already under negotiation with a buyer, but the negotiation has not proceeded to the point at which the IRS would consider it a prearranged sale, which could result in you bearing the tax liability for any gain on the sale. 
• Contributions of shares, held for over a year, to a charity are generally deductible at fair market value on the date of contribution. A qualified appraisal is required to substantiate the fair market value.
• Appraisals must be obtained no earlier than 60 days before the date of donation and no later than the due date of your tax return (including extensions) for the year of the gift. Appraisals depend on the facts and circumstances at the time of contribution and the value of your claimed deduction may be discounted for lack of marketability and/or minority interest. 
• The company’s shareholder, operating, or limited partnership agreements and other governing documents must be reviewed by the charity to understand transfer restrictions, timing, and process to complete the charitable transfer.
• Gifts of indebted interests may trigger negative tax consequences for you and the charity.

Additional considerations for gifts of S-Corp stock:

• A DAF or other public charity will generally be subject to unrelated business income tax (UBIT) on its gain from the sale of the shares and on its share of any income generated by the S-Corp during its ownership.
• The charity may use the proceeds of the sale to pay these taxes and may escrow a portion of the proceeds in a separate account for three years to match the IRS’s “look-back” period, during which the IRS can challenge the cost basis of the shares and the taxes paid.

Unique features for gifts of Limited Partnerships (LPs) or Limited Liability Corporations (LLCs):

• Deductibility rules, holding period considerations, and adjusted gross income limits are generally the same as those for privately held stock.
• Lack of marketability and/or presence of minority interest discounts may apply to the qualified appraisal. 
• Partnerships and most multi-member LLCs generally are taxed as flow-through entities. Thus, if the entities engage in an active trade or business or have acquired assets with debt, the DAF or other public charity may be subject to UBIT on its share of the entity’s income.
• Gifts of indebted interests may trigger negative tax consequences for you and the charity. As a general rule, the charitable deduction must be reduced by the amount of ordinary income that would have been realized if the interest had been sold at fair market value on the date contributed. 

Real estate

If you contribute highly appreciated real estate to a DAF or other public charity, you may potentially eliminate capital gains tax on the appreciation and be entitled to a fair market value tax deduction for the donation. A qualified appraisal is required to substantiate the fair market value. 

It can make sense to donate real estate that meets the following criteria: 

• The property has been held for more than a year and has appreciated significantly.
• The property is marketable and relatively easy and cost-effective to liquidate.
• The property is debt-free.
• You, as the owner, are willing to irrevocably transfer the property to the charity, which will negotiate the sale price and control the sale, often using an experienced intermediary.
• Sale negotiations have not proceeded to the point at which the IRS would consider it a prearranged sale, which could result in you bearing the tax liability for any gain on the sale.

These criteria most often apply to donations of a primary or secondary home, or other residential property or commercial property.

Cryptocurrency

A gift of cryptocurrency, such as bitcoin, to a DAF or other public charity is not recognized by the IRS as a gift of currency or legal tender. For tax purposes, cryptocurrencies are treated as capital assets or income, depending on whether the cryptocurrency was held for investment purposes or received as a form of compensation.

It is important to note the unique tax features of cryptocurrencies: 

• If the asset was held as an investment for more than one year and you itemize deductions, you may deduct the fair market value of the gift, up to 30% of your adjusted gross income (AGI) with a five-year carryover for any amount in excess of this AGI limit
• Generally, a qualified appraisal is required to substantiate a claimed income tax deduction.
• For cryptocurrency investments held less than a year and for cryptocurrency treated as an ordinary income asset, your claimed deduction may be limited to the lesser of cost basis or fair market value, up to 50% of AGI with a five-year carry forward.

Fine art and collectibles

Charitable gifts of collectibles and fine art to a DAF —or other public charity where there is no “related use” for the art—are eligible for a charitable deduction at the lesser of your cost basis or fair market value at the time of your donation. 

Depending on how you obtained your collectibles or fine art, selling these assets may expose you to a higher capital gains tax rate than other capital assets. A donation can help you potentially reduce or eliminate this tax liability. Generally, a qualified appraisal is required to substantiate a claimed income tax deduction.

Life insurance

If you no longer need your permanent life insurance, you could consider contributing the policy to a DAF or another public charity. There are two primary methods to do so:

• You can transfer the policy ownership and beneficiary interest, at which point the charity could choose to surrender the transferred policy for its cash value. This method allows you to make a charitable impact during your lifetime. There are also tax advantages to this method: You generally eliminate the income tax you’d incur if you surrendered the policy yourself, your policy’s value could potentially be reduced from your gross estate (lowering its eventual tax burden), and you may claim a current-year tax deduction if you itemize your deductions. Generally, your deduction is limited to your adjusted cost basis in the policy (usually premiums paid to date).
• If you prefer not to transfer your policy, you can also name a charity as beneficiary of your policy. The charity would benefit from the policy after your lifetime, and your estate would be entitled to claim a charitable estate tax deduction for the beneficiary proceeds distributed to charity. However, you would not realize any tax benefits while living.

Equity compensation awards

Certain equity compensation awards often have a low cost basis and significant current market value that result in a large capital gains tax bill when sold. If you itemize deductions, these appreciated shares, held more than one year, may provide a large tax benefit in the form of a current year, fair market value income tax deduction and elimination of capital gains taxes.

The most common forms of equity compensation awards are non-qualified stock options, incentive stock options, restricted stock units, and restricted stock awards. The awards themselves are generally not transferable and therefore cannot be given to charity. However, as a general rule, once these awards are vested and/or exercised and the underlying stock is held for more than one year, a gift may be made.

Post-IPO stock

An initial public offering (IPO) can accelerate appreciation of private company stock held by founders, executives, and early employees. An IPO wealth event may result in substantial capital gains taxes when the stock is sold. If you are a charitably minded investor, donating a portion of your stock to a DAF or other public charity after the lock-up period expires may provide you with a current year, fair market value income tax deduction and potentially eliminate capital gains taxes.

The decision as to whether and how charitable gifts of stock may be made during a lock-up period is determined by the issuer’s counsel. In cases where gifts can be made during a lock-up period, any restrictions that materially affect the value of the shares or prevent the shares from being freely traded may require you to obtain a qualified appraisal to substantiate the fair market value, which may be subject to valuation discounts.

Private equity fund interests 

By donating highly appreciated alternative investments to a DAF or other public charity, you can take a fair market value tax deduction—as determined by a qualified appraisal—for the donation while potentially eliminating capital gains tax on the distributions and appreciation.

Considerations include:

• The charity’s acceptance of an alternative investment may be conditioned on its ability to redeem or sell the investment.
• Minority limited partnership interests in alternative investments are highly illiquid until fully realized and redeemed by the general partner. Sales of these interests in the secondary marketplace may be subject to steep discounts. 
• Some charities may be able to hold private equity fund interests until scheduled termination dates in order to realize the full value of the investment.
• Charities generally will not assume liabilities associated with these investments. You should plan to contribute sufficient liquid assets to cover your grant recommendations from your DAF account as well as the private equity fund’s open commitments, UBIT, or other liabilities.

Interested in learning more? 

• The Charitable Strategies Group at DAFgiving360 is a team of professionals with specialized knowledge about non-cash asset contributions to charities. Our team stands ready to support you, from initial consultation through asset evaluation, receipt, processing, and sale. We strive to provide unbiased guidance and frequent communication at every step of the process to help donors and financial advisors make informed decisions and stay aware of the time required for your transaction.
• For more information about the advantages of contributing appreciated non-cash assets, call us at 800-746-6216.
• If you would like to learn more about DAF accounts from DAFgiving360, click here.