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Donating appreciated non-cash assets

Equity compensation awards

by the Charitable Strategies Group at DAFgiving360™

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Many people who have equity compensation are both concentrated in their company stock and give to charity. Equity compensation can make an excellent gift to charity because of the potential charitable impact and tax benefits available to the donor. These investments often have a low cost basis and may have a significant current market value, resulting in a large capital gains tax bill when sold. 

Donating these awards can unlock additional funds for charity in two ways.

First, you potentially eliminate the capital gains tax you would incur if you sold the stock yourself and donated the proceeds, which may increase the amount available for charity by up to 20%. Second, you may claim a fair market value charitable deduction for the tax year in which the gift is made and may choose to pass on that savings in the form of more giving.

Donor-advised funds, which are 501(c)(3) public charities, provide an excellent gifting option for donations of equity compensation awards, as the funds typically have the resources and expertise for evaluating, receiving, processing, and liquidating the assets.

The process starts with the donor’s contribution of vested or exercised awards held over one year. With this contribution, the donor potentially eliminates capital gains tax on the appreciation and can claim a current year, fair market value income tax deduction. The donor then recommends how assets are invested for tax-free potential growth. Donors have potentially more to grant through the investment growth of the account assets. The donor can then recommend grants from their account

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: 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 donor-advised funds are irrevocable. Please consult with your tax or legal advisor.

Equity compensation award types generally are not transferable until vested or exercised.

The most common forms of equity compensation awards are non-qualified stock options (NSOs), incentive stock options (ISOs), restricted stock units (RSUs), and restricted stock awards (RSAs).* The awards themselves generally are not transferable and therefore cannot be given to charity. However, once these awards are vested and/or exercised—and the underlying stock is held for more than one year—they make tax-smart charitable gift options.

What award types are ideal for donating to charity?

Not all equity compensation awards are treated the same for purposes of the charitable income tax deduction. As illustrated below, ideal gift options meet the IRS’s holding period requirements of at least more than one year and have high appreciation above your cost basis. Such gifts enable you to potentially eliminate capital gain tax on the difference between fair market value on the date donated and fair market value when vested or exercised, while also claiming a charitable income tax deduction.

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* Additional considerations are involved when gifting restricted stock. You may own stock acquired from equity compensation awards that, due to your status as an executive in the business or other factors, may have resale restrictions. Donating restricted stock may require due diligence by the charity prior to acceptance, as the gifting process can involve certain additional paperwork and regulatory filings. Read this article to learn more about donations of restricted stock.

† Tax treatment of ISO stock transferred to charity before holding period requirements are met is not included. Please consult with appropriate tax or legal advisor on specifics.

‡ Difference between FMV at exercise and exercise price is an AMT preference item included in your AMT calculation. You may lose AMT preference item on contribution.

§ 60% of AGI deduction limit with a five-year carryover is permitted for charitable contributions of cash. Note: any short-term capital gains tax paid reduces value of gift to charity.

Case study: charitable tax planning opportunity

Cheryl is a founder and senior executive of TechCo, a technology company that recently went public. She has accumulated a significant amount of restricted stock from the vesting of RSUs that she has held for more than one year.

Cheryl is eager to plan for her family’s future and charitable giving is a big part of her goals. In addition, she has always been charitably minded and will have an usually high income this year, so a charitable gift could help her to minimize tax exposure.

After speaking with her financial advisor, Cheryl learns how she can easily fund a donor-advised fund (DAF) account to receive a current-year tax benefit while making more money available to charity over time.

Cheryl decides to fund a DAF account with $1 million of her TechCo company stock, with a cost basis of $50,000. By donating $1 million of TechCo stock directly to charity, as shown in Option 2 below, Cheryl eliminates $190,000 in projected federal capital gains taxes and this money is instead available to grant to charities through her DAF account. She also has an additional $260,300 in tax savings from her claimed income tax deduction.

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This hypothetical example is only for illustrative purposes. The example does not take into account any state or local taxes or the Medicare net investment income surtax. The tax savings shown is the tax deduction, multiplied by the donor’s income tax rate (37% in this example), minus the long-term capital gains taxes paid.

Gifts of restricted stock to charity are typically deductible, for those who itemize, at fair market value. Values may be subject to discount based on the specific restrictions if the restrictions are not cleared prior to contribution. In the above hypothetical case study, the restriction was cleared prior to contribution. For gifts of more than $5,000, the donor must obtain a qualified appraisal if the restrictions are not cleared prior to contribution. Such valuations vary wildly, depending on the nature of the specific restrictions. No discount was applied in this example because the restriction on the gift was cleared prior to contribution. The example assumes full deductibility (gifts to public charities, including donor-advised funds, of property held longer than one year are generally limited to 30% of AGI with a five-year carryover of any unused amount).

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