How Noncash Charitable Gifts Can Help Reduce Taxes

March 13, 2024
Leveraging the appreciation of assets such as real estate or stock to make charitable gifts can help maximize your philanthropic impact and reduce your taxes.

Giving to a public nonprofit may traditionally involve writing a check, but more donors these days maximize their giving with noncash assets. In 2023, these assets made up 64% of contributions to Schwab Charitable™ accounts—a 4% increase over the previous year. 

"Contributing appreciated noncash assets can be more helpful for both the charity and the donor," says Susan Hirshman, director of wealth management at Schwab Wealth Advisory, Inc. "If you are philanthropically minded and have accumulated significant gains from investments, this strategy could make sense." Here's how it works.

Focus on high-value, low cost basis investments

Selling significantly appreciated assets—whether it's real estate, securities, cryptocurrency or more unique property like private business interest, collectibles, and equity compensation—can generate large capital gains. But if philanthropy is part of your overall plan and you itemize deductions on your taxes, donating a long-term capital asset to charity can allow you to enjoy a double tax advantage:

  • You can potentially eliminate the capital gains tax you would owe if you sold the asset.
  • You may deduct your donation (subject to applicable limitations) based on the asset's fair market value.

In addition, the possible elimination of capital gains tax on the sale of an asset can also increase your donation amount to the nonprofit. (See below.) Because of their tax-exempt status, 501(c)(3) nonprofits can then sell these assets without any tax consequences. 

"While taxes should not be the primary consideration for charitable giving, they are part of the equation—especially when it involves illiquid assets with a very low cost basis," Susan says. "A good philanthropy strategy takes into account the overall impact on the donor as well as the recipient of a gift."

Minimize taxes, maximize impact

A direct charitable gift of appreciated stock with an original cost basis of $50,000 and a fair market value of $1 million could save you more on taxes and increase your giving capacity compared to selling the stock and donating the proceeds.

  • Sell stock and donate after-tax proceeds 
  • Donate stock directly to a nonprofit
  • Long-term capital gains taxes
  • Sell stock and donate after-tax proceeds 
    ($950,000 x 0.20)
  • Donate stock directly to a nonprofit
  • Charitable gift and tax deduction
  • Sell stock and donate after-tax proceeds 
    ($1,000,000 – $190,000)
  • Donate stock directly to a nonprofit
  • Tax savings
  • Sell stock and donate after-tax proceeds 
    ($810,000 x 0.37 – $190,000)
  • Donate stock directly to a nonprofit
    ($1,000,000 x 0.37)

To receive this double tax advantage, you must have held the asset for more than a year before donating it. Keep in mind that, in most cases, the IRS generally limits deductions for long-term noncash donations to 30% of your adjusted gross income (AGI), versus 60% of AGI for cash donations. 

"However, if your donation exceeds the limit in a single year, you may be able to carry over and use the excess amounts over the next 5 years, subject to the AGI limitations.," Susan says. "It's a good idea to examine your giving holistically within your wealth management plan and work with your wealth advisor or a tax professional to understand how it fits your goals."

How your Schwab Wealth Advisor can help

Your Schwab Wealth Advisor can connect you to a tax and trust specialist and Schwab Charitable™ to help you create a comprehensive charitable giving strategy.

Your Schwab Wealth Advisor can connect you to a tax and trust specialist and Schwab Charitable™ to help you create a comprehensive charitable giving strategy.

All assets are not treated the same

"Generally speaking, an individual can donate almost anything," says Caleb Lund, director of the Charitable Strategies Group at Schwab Charitable. "The question for donors to consider is whether a gift ultimately helps the nonprofit and aligns with the donor's wealth management objectives." 

Many charities are not equipped to handle the complexities of non-publicly traded and illiquid assets like private businesses, cryptocurrency, certain types of stock, or collectibles, to name a few. "Nonprofits are more focused on fulfilling their charitable mission and may not frequently deal with the liquidation of contributed assets," Caleb says. "If the asset is not marketable and a charity can't sell it quickly or without expending significant resources, it may not be the best gift." 

In addition, special rules apply to certain types of assets that may limit their value or transferability. Art and collectibles, for example, are subject to the IRS' "related use" rule; generally, if you donate these assets to a charity that doesn't use them to fulfill its mission, your deduction may be the lesser of the original value or the fair market value. "Noncash gifts can involve very complicated analysis, so you should consult your tax or legal advisor," Caleb says.

Consider a sophisticated approach

One efficient way to lessen the burden of an illiquid gift on a prospective charity is to open an account with a donor-advised fund (DAF). Many DAFs, including Schwab Charitable, have resources to help you assess whether a noncash gift might satisfy your goals. 

"A donor-advised fund like Schwab Charitable is a 501(c)(3) public charity, so donors enjoy the tax advantages of donating noncash assets when they make an irrevocable asset transfer to it," Caleb says. DAFs generally have more resources than the average nonprofit to evaluate, receive, process, and liquidate assets. "Once the funds from the sale of an asset are in a DAF account, a donor can make cash grants to the public charity of their choice." Additionally, when you give via a DAF account, your contributions can be invested for potentially tax-free growth.

"Noncash asset gifts to charity don't have to be onerous," Susan says. "Using a DAF not only simplifies the process, but also opens the doors to continue expanding your charitable legacy."

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

Schwab Wealth Advisory™ ("SWA") is a non‐discretionary investment advisory program sponsored by Charles Schwab & Co., Inc. ("Schwab"). Schwab Wealth Advisory, Inc. ("SWAI") is a Registered Investment Adviser and provides portfolio management for the SWA program. Schwab and SWAI are affiliates and are subsidiaries of The Charles Schwab Corporation

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

Schwab Charitable Fund is recognized as a tax-exempt public charity as described in Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Internal Revenue Code. Contributions made to Schwab Charitable Fund are considered an irrevocable gift and are not refundable. Once contributed, Schwab Charitable has exclusive legal control over the contributed assets.

Schwab Charitable™ is the name used for the combined programs and services of Schwab Charitable Fund™, an independent nonprofit organization. Schwab Charitable Fund has entered into service agreements with certain subsidiaries of The Charles Schwab Corporation.

A donor's ability to claim itemized deductions is subject to a variety of limitations depending on the donor's specific tax situation. Consult a tax advisor for more information.

Market fluctuations may cause the value of investment fund shares held in a donor-advised account to be worth more or less than the value of the original contribution to the funds.