Merging Charitable Measures with Tax Advantages: Contributing Appreciated Stock to a Donor-Advised Fund

When you buy stock, the hope is that it will appreciate. But too much appreciation can lead to a "tax time bomb" in the form of excessive capital gains, leaving you feeling trapped. 

One way to avoid additional taxes on appreciated stock is to donate the asset to a donor-advised fund (DAF). This route allows you to aid your favorite charity while benefiting from tax advantages. We should note up front that this strategy is really only appropriate if you consider yourself charitably-inclined, meaning that it is important to you from a values perspective to give charitably. 

Understanding Donor-Advised Funds (DAFs)

A DAF is an investment account that functions as a conduit for donating assets to 501(c)(3) public charities. It’s dubbed “donor-advised” because you (the donor) advise the fund’s sponsor (which handles the administrative oversight) as to which favorite charity or charities you want your money or asset contributions to go to. The sponsor disburses grants to that charity. Monies that aren’t distributed in a given year are re-invested. This allows your contribution to grow, meaning more value for your designated charities. You can also contribute to that DAF as often as you want.

The Value of Contributing Appreciated Stock to a DAF

You could sell your appreciated stock and donate the proceeds to a DAF. However, you’d be taxed on the capital gains from the sale within your brokerage account in the tax year of the sale. Capital gains are defined as the difference between the price you initially paid for the stock and what you earned when selling it. Gains on positions that have been held for less than one year-- "short term"-- get taxed as income, but gains on positions held for over one year -- "long term" -- get taxed more preferentially. As of 2024, most Americans' long-term capital gains tax rate is 15% (single tax filers earning over $492,300 and married filers earning over $583,751 will pay 20% capital gains tax on long-term holdings). 

But you can avoid any capital gains tax if you donate your appreciated stock to a DAF without selling it. Here’s how it works.

If you acquired 1,000 shares of Gizmo Stock ten years ago at $5 per share, you paid a total of $5,000. The stock today is valued at $15 per share, meaning it has appreciated by $10,000, and is now worth $15,000. When you sell the stock, you’re taxed on that appreciation (capital gains); in most cases, the amount is taxed at 15%. This means you would owe the IRS $1,500, leaving you with $13,500 rather than the entire $15,000.

Instead, donating the appreciated stock means the entire $15,000 value—plus any future appreciation—goes into that DAF. You’re off the hook for the capital gains tax! Furthermore, if you itemize deductions at tax time, you could claim a current-year deduction for the stock’s $15,000 fair-market value, thus lowering your taxable income for the year. It's worth noting that funds donated to a DAF can stay invested, so if you don't end up gifting out everything you donated to charities, the funds will continue to grow in the DAF, leaving you more total funds to give to the organizations you care about. 

Lowering your income in a given tax year can help with other tax-planning strategies, like Roth conversions. With a Roth conversion, you take a distribution from a Traditional IRA, pay necessary taxes (while in that lower income tax bracket) and immediately move that distribution into a Roth IRA. Your distribution grows tax-free, and the required minimum distributions do not bind you. A Roth conversion could be an ideal tax strategy, especially as our historically low current tax brackets are anticipated to disappear on Dec. 31, 2025.