Give Stock and Increase Its Basis

Let’s say this is the year that you have decided to make a larger gift than usual to a charity such as ours. You are well aware that, from a tax standpoint, it is better to give appreciated securities because you get a deduction for fair-market value and avoid being taxed on the capital gain. However, ABC stock, the most highly appreciated stock in your portfolio, appears to have the greatest growth potential. Thus, you are inclined to retain this stock and make your gift with cash.

Before you do that, consider this alternative: Contribute the stock and then use your cash to repurchase it, thereby achieving a stepped-up basis. Suppose, for example, that you own 1,000 shares of ABC stock. It is currently selling for $50 per share, but you purchased it for only $10 per share. Suppose also that you have a fair amount of cash in money market funds and CDs that is earning precious little interest.

You give the stock, paying no tax on the gain and receiving a charitable deduction of $50,000. You then use $50,000 of your cash to repurchase your stock. The stock rises in value to $80 per share within the next few years, and you decide it’s time to sell it. You are taxed on $30,000 of gain ($80,000 selling price minus your stepped-up basis of $50,000). If you had contributed cash and simply retained the stock, you would have been taxed on $70,000 of gain ($80,000 selling price minus your original basis of $10,000).

Perhaps you are wondering whether this would be characterized as a “wash sale,” referring to selling a security at a loss and then repurchasing it within 30 days. When you do that, you cannot claim a deduction for the tax loss, though the loss can be added to the basis of the stock that you repurchase. The transaction that we are describing does not entail selling a security at a loss, and the only deduction claimed is for the charitable gift. Thus, you would be able to repurchase the contributed stock as soon as you wish.

Is there any downside to the transaction? Only the fact that the amount of the charitable deduction you can claim in any one year would be 30 percent, rather than 50 percent of your adjusted gross income. (The limit is 50 percent for gifts of cash and 30 percent for gifts of appreciated property owned for more than a year.) You would have the year of the gift plus up to five carry-over years to use the deduction.

Learn more

Find gift-planning articles and advice.