Equity Compensation

Advanced Tax Strategies for Donating Equity Awards

May 28, 2024 • Caleb Lund
Discover which types of equity compensation can be donated to charity, and what the potential tax benefits of those donations may be.

Many people who have equity compensation are both concentrated in their company stock and charitably minded. What if you could manage both by donating stock?

Equity compensation can make an excellent gift to charity because of the potential charitable impact and tax benefits available to the donor. If you donate these stock awards directly to charity (rather than selling them first and then donating cash proceeds) you may be able to eliminate capital gains tax you would have paid, resulting in up to 20% more to charity. In addition, you may claim a fair market value deduction for your gift.

Donor-advised funds, which are 501(c)(3) public charities, are an excellent gifting option for donations of company stock awards, as the funds typically alleviate the tax burden on what is often highly appreciated stock.

Image illustrates how a donor can donate vested or exercised awards to a donor-advised fund where account assets are invested for tax-free potential growth and can ultimately benefit a charity.

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 awards generally aren't transferable until vested or exercised

The most common forms of equity compensation awards are typically restricted stock units (RSUs), restricted stock awards (RSAs), non-qualified stock options (NSOs), and incentive stock options (ISOs). The awards themselves are generally 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 can make excellent tax-smart charitable gift options.

What types of equity compensation can be donated to charity?

Not all equity compensation awards are treated the same when it comes to the charitable income tax deduction. As illustrated below, ideal gift options should meet IRS 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.

Equity compensation awardsTax treatment upon vesting or exerciseYour charitable gift optionPotential tax benefitsGift rating
Vested Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs) held greater than 1 year from vesting§§Ordinary income tax on difference between fair market value (FMV) at vesting and amount paid for your stockEliminate capital gain recognition on difference between cost basis and FMV at gift dateDeduction at FMV, up to 30% of your adjusted gross income (AGI), with 5-year carryoverIdeal
Stock received upon Nonqualified Stock Option (NSO) exercise held greater than 1 year from exerciseOrdinary income tax on the difference between the exercise price and the stock's FMV at exerciseEliminate capital gain recognition on difference between cost basis and FMV at gift dateDeduction at FMV, up to 30% of your AGI, with 5-year carryoverGood
Stock received upon Incentive Stock Option (ISO) exercise held greater than 1 year from exercise and 2+ years from grant§No ordinary income tax, although Alternative Minimum Tax (AMT) may applyEliminate capital gain recognition on difference between cost basis and FMV at gift date**Deduction at FMV, up to 30% of your AGI, with 5-year carryoverGood
Vested RSUs and RSAs held 1 year or lessOrdinary income tax on difference between FMV at vesting and amount paid for your stockNo advantage to selling your stock and donating cash proceeds††Deduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryoverGood
Stock received upon NSO exercise held 1 year or lessOrdinary income tax on difference between exercise price and your stock's FMV at exerciseNo advantage to selling your stock and donating cash proceeds††Deduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryoverGood
Unvested RSUs and unexercised ISOsNot transferrable to charityNot transferrable to charityNot transferrable to charityUnacceptable
Unexercised NSOsNot applicableGenerally, not transferrable; exercise by charity may result in ordinary income tax to youDeduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryoverUnacceptable
Vested Performance Stock Units (PSUs) and Performance Stock Awards (PSAs) held greater than 1 year from vestingOrdinary income tax on difference between FMV at vesting and amount paid for your stockEliminate capital gain recognition on difference between cost basis and FMV at gift dateDeduction at FMV, up to 30% of your AGI, with 5-year carryoverIdeal
Vested PSUs and PSAs held 1 year or less from vestingOrdinary income tax on difference between FMV at vesting and amount paid for your stockNo advantage to selling your stock and donating cash proceeds††Deduction at lesser of cost basis and FMV, up to 50% of your AGI, with 5-year carryoverGood
Employee Stock Purchase Plans (ESPPs) Tax-qualified ESPPs held greater than 1 year from purchase and greater than 2 years from the grantNo ordinary income tax, although you must meet holding period requirements prior to gifting or there may be income recaptureEliminate capital gain recognition on difference between cost basis and FMV at gift date. Recognize ordinary income on the discount amount.Deduction at FMV, up to 30% of your AGI, with 5-year carryoverModerate
Stock Appreciation Rights (SARs)Generally, not transferrable; any transfer may result in adverse tax impact to youUnacceptable

Disclosures

*This generally is senior officers, directors, and shareholders with greater than 10% equity.

† Rule 144 is a regulation enforced by the U.S. Securities and Exchange Commission. The regulation provides an exemption that allows the public resale of restricted, unregistered, and control securities if a number of conditions are met. This includes how long the securities are held, the way in which the securities are sold, and the amount of securities that can be sold at a certain time.

§ 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.

§§ 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.

Case study: Charitable tax planning opportunity

Cheryl is a 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 unusually high income this year, so a charitable gift could help her to minimize tax exposure.

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

Cheryl decides to fund a donor-advised fund account with $1 million of 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 donor-advised fund. She also has an additional $260,300 in tax savings from her claimed income tax deduction.

This graphic illustrates how Cheryl can potentially eliminate $190,000 in projected federal capital gains taxes allowing for an additional $190,000 for a tax deduction and available to grant to charities.

For illustrative purposes only.

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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.

Investing involves risk, including loss of principal.

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.

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